Bit Gold: Meaning, Overview, and Differences From Bitcoin

What Was Bit Gold?

Bit Gold was one of the earliest attempts at creating a decentralized virtual currency, proposed by blockchain pioneer Nick Szabo in 1998. Although the Bit Gold project was never implemented, Szabo's attempt is widely considered to be the precursor to Satoshi Nakamoto's Bitcoin protocol. In fact, the Bit Gold and Bitcoin protocols draw such close parallels that people have speculated that Szabo is the anonymous Bitcoin creator, Satoshi Nakamoto (although Szabo has denied this claim).

Bit Gold combines different elements of cryptography and mining to accomplish decentralization. These elements include time-stamped blocks that are stored in a title registry and are generated using proof-of-work (PoW) strings. Szabo proposed a decentralized PoW function that could be "securely stored, transferred, and assayed with minimal trust."

Understanding Bit Gold

There are many similarities between Bitcoin and Bit Gold, specifically the systems used to process transactions and to secure the decentralized network.

Blockchain

In the Bit Gold structure, a user would solve a cryptographic puzzle using computing power. All solved puzzles would be sent through a Byzantine Fault Tolerant (BFT) peer-to-peer network and assigned to the public key of the puzzle solver. Details relating to the transaction were stored in a title registry (comparable to a blockchain in the consensus system because it offered an immutable record of an order for transactions that have taken place).

Every solution then became a part of the next puzzle, creating a chain that linked the most recent puzzle’s solution to the outcome of the following one, thereby validating blocks of transactions. This was similar to the block creation process Bitcoin uses, where hash addresses are used as headers pointing to the next set of blocks.

Unspent Transaction Outputs

The Bit Gold system used unspent transaction outputs (UTXOs) like Bitcoin, but Szabo referred to these small portions as "different pieces of bit gold." These small pieces could not be exchanged for another because they had different values—in today's terms, they were non-fungible. Just like Bitcoin, these smaller quantities of currency (the UTXOs) would be combined to make the required amount of currency. When they were combined, they could be exchanged, making them fungible.

Decentralization

Instead of a centralized authority controlling its levers, Bit Gold functioned on a decentralized and distributed system of trust between individual nodes—participating computers—that would theoretically make up its network.

Mining Difficulty

Szabo envisioned that the difficulty of mining Bit Gold would vary over time. It would not necessarily get easier or harder, but there would be fluctuations in the amount of Bit Gold that could be created at various points in time.

How Is Bit Gold Different From Bitcoin?

Bit Gold was never developed beyond discussions and proposals into code, so it is difficult to discern differences in how its network would have operated. Based on Nick Szabo's writings, there are some key differences that separate the two.

In 2011, Szabo wrote that his design was to have Bitgold's price set by the market. Nakamoto implemented a proof-of-work design that incentivized nodes (individual miners) rather than a proof-of-work that only proved ownership.

This, along with a change in how the mining difficulty was adjusted and a decreasing number of available tokens, was thought to be the price influencer.

Goals of Bit Gold

Szabo said he created Bit Gold to address some of the inefficiencies in the traditional financial system. According to Szabo, parties must invest a great deal of trust in each other for transactions to take place in the traditional financial system. For example, when a consumer wants to take out a loan, they first must locate a broker. Then, once they've accepted the loan from a financial institution, the institution must trust that that individual will repay the loan as agreed. By the same token, customers of a bank must trust that their money is well-secured and not being embezzled by the bank.

Unfortunately, transacting through trust-based systems leaves consumers and financial institutions vulnerable to fraud or theft. In fact, the financial system's legacy of consistent losses (and the huge cost of this fraudulent activity and siloed architecture motivated Szabo to introduce Bit Gold, a more trustless model for transacting.

Special Considerations

In 2008, a mysterious figure writing under the name Satoshi Nakamoto released a proposal for Bitcoin. Nakamoto's true identity is still a secret, though many people have speculated that Szabo is behind the whitepaper. And although there is some circumstantial evidence, there is no proof that Nakamoto is Szabo. In 2008, before the Bitcoin whitepaper was published, Szabo authored a comment on his blog that said he was creating a live version of his hypothetical currency. In 2015, in The New York Times, Nathaniel Popper wrote that "the most convincing evidence pointed to a reclusive American man of Hungarian descent named Nick Szabo."

The Bottom Line

Bit Gold is widely considered to be the design that inspired Bitcoin. It was introduced by Nick Szabo in 2005 and is thought to have been improved upon by Satoshi Nakamoto in the Bitcoin design.