👻 The Ghost Of Satoshi — Issue No. 96

On Wednesday, May 20th, 2020, someone moved Bitcoin that had not been touched since being mined in February of 2009, a mere month after Satoshi launched the network. The owner of these coins is one of Bitcoin's earliest users. Link.

Believe it or not, the movement of these coins is rather noteworthy. In this edition of Build Blockchain, we'll explore why that is, and what it means for Bitcoin's positioning as a form of digital gold, money, and un-seizable bearer asset. We'll close by touching on what this tells about fungibility and privacy on decentralized networks today.

Satoshi's Return?

As news broke that these early coins had moved, Bitcoin's price dropped sharply. With an asset as volatile as Bitcoin, it's always a bit dubious to assign causality between events and price movements. Anecdotally, though, it does seem that a small sell-off occurred in reaction to this news.

Why would investors care about an early Bitcoin user moving his or her funds? The "fear" is that this early user is in fact Satoshi Nakamoto, Bitcoin's pseudonymous founder who disappeared years ago, and that the movement of these coins shows he still controls the keys for all the Bitcoin mined early in the network's history.

Satoshi mined a lot of Bitcoin. According to analysis published by Sergio Demián Lerner, Satoshi's wallets control 1.1 million BTC which has never moved since being mined. That's $10 billion worth of Bitcoin at today's price. If Satoshi returned, and decided to start selling his stash, it could crater the market. Link.

Lucky for Bitcoin holders, that same analysis also demonstrates why these particular coins are probably not his. Lerner uncovered that all the blocks seemingly mined by Satoshi follow a particular pattern in their "extranonce" field. This is one of the data fields in each Bitcoin block that miners manipulate while searching for a valid hash. Lerner named this the "Patoshi" pattern, and the block where the recently moved coins were mined did not adhere to it. Link.

Gini In A Bottle

While we can’t say for sure that these aren’t his coins, it seems unlikely, based on the analysis cited above, that Satoshi will be dumping 1.1 million BTC on Binance anytime soon. Of course, the reason to be worried about Satoshi’s return isn’t just that he might choose to start selling his coins. There are more subtle factors which make Satoshi's gargantuan stash problematic.

Bitcoin is positioned to be the best form of “digital gold” available, based on its monetary supply, its network security, its proven track record over the course of 11 years, and many other factors. Gold has a $7 trillion market cap, while Bitcoin's sits at $168 billion. It's not unreasonable to wonder if, over time, Bitcoin could come to rival gold as a risk-off asset during economic uncertainty, and therefore approach a similar market cap in the far future.

Now, Satoshi's 1.1 million BTC is more than 5% of the total Bitcoin that will ever exist. Can you imagine if a single person owned 5% of all the gold in the world, a stake worth $350 billion? This would make Satoshi three times richer than the world's richest person today, Jeff Bezos. His net worth is $116 billion and comprised almost entirely of Amazon stock.

Having a single entity control such a huge percentage of an asset aiming to be a store of value is problematic. It gives that person the ability to manipulate the price wildly. It also makes them a target for thieves or hackers. People are less likely to adopt Bitcoin if they believe a market crash could be triggered by a single person having their cold storage compromised, or just waking up on the wrong side of the bed, for that matter.

Such wealth concentration also contradicts many people's general sense of fairness. This point will bother some. After all, shouldn't Satoshi be rewarded for his creation? Maybe, maybe not, but the truth is, if people find Bitcoin's distribution unfair, they'll be less likely to adopt it.

Lost But Not Taken

Generally speaking, I believe most investors assume Satoshi's coins are lost for good, perhaps because Satoshi destroyed the keys, or maybe because he died. If we ever get definitive evidence they're not, it will be a bad day for Bitcoin. More precisely, the existence of these 1.1 million BTC, and the risk that they'll be recovered someday, probably depresses Bitcoin's price even today. The longer we go without them moving, the less investors will sweat them, but their existence adds uncertainty about the "real" supply and distribution of BTC.

Let's imagine a crazy, but not implausible, scenario. What if Satoshi passed away unexpectedly years ago, and his heirs unwittingly sold his computer. Maybe right now, there's a twelve year old playing Minecraft on a $10 billion laptop her parents picked up on eBay for 200 bucks. Maybe in a few years, that technically savvy teen will find Satoshi's keys and recognize them for what they are. What chaos would this unleash for Bitcoin? The mere specter of such an event is a liability.

One naive solution that has been proposed over the years is altering the network rules to remove or redistribute these coins. There is a certain appeal to this, as it would alleviate the aforementioned uncertainty, and they could be used for something positive, like helping secure the network as block rewards diminish. A couple of years ago, I probably would have been in favor of such a change. Today, though, I'm much less sure.

Part of what makes Bitcoin so appealing is its perception as an immutable, censorship resistant digital asset. Eleven years after mining them, the user who moved those 50 Bitcoin this week still had exclusive rights to them today. The network transferred them with no questions asked. When you stop and think about it, this is rather amazing.

Seizing or redistributing Satoshi's coins, even if narrowly good for the network in some ways, would risk breaking this spell. It would water down the social consensus around immutability, and it's the social consensus which ultimately undergirds the technical one. While I do see Satoshi's coins as a liability, any attempts to "fix" this problem would probably prove more perilous than the coins' continued existence.

The Very Public Elephant In The Room

There's one last point regarding Satoshi's wallet, and the movement of these "ancient" coins, that I would be remiss not to make. In an ideal world, all of this would be a moot point. The market shouldn't panic sell when it sees old mining rewards moving, because investors should never know such coins are being moved in the first place. This brouhaha only underscores how weak privacy and fungibility are on most cryptonetworks today.

I've written extensively on privacy in past editions of this newsletter. There are tons of people working on this issue, and the options available get better with every passing month. As I discussed, privacy isn't a technical problem, it's a social one. Users have to be willing to bear the extra friction and cost that will always come with privacy enhancing solutions. Link.

Perhaps this incident, as a reminder of the ever-looming threat posed by Satoshi's coins, can add some extra incentive for users and investors to demand better privacy for Bitcoin.