The bootstrapping of Thorne, Magic Money, and Cyberbucks: three pre-Bitcoin monetary experiments

https://jpkoning.blogspot.com/2017/11/the-bootstrapping-of-thorne-magic-money.html
jp koning

Bitcoin boasts many technical achievements, but none is more interesting
 to me than they way it was successfully bootstrapped. How did a small 
group of cypherpunks—activists interested in widespread use of 
cryptography and digital currency—manage to get an intrinsically 
valueless token to have a consistently positive price? Hal Finney, a 
cryptographer and early adopter of bitcoin, put it this way in 2009:




"One immediate problem with any new currency is how to value it. Even 
ignoring the practical problem that virtually no one will accept it at 
first, there is still a difficulty in coming up with a reasonable 
argument in favor of a particular non-zero value for the coins."
The bootstrapping of bitcoin seems to have been achieved with some care. William Luther
 has gone through old bitcoin message boards to show how early adopters,
 including Finney and bitcon-creator Satoshi Nakamoto, coordinated to 
'enter the network' at the same time, thus generating a positive value 
for worthless bitcoin tokens. A token that is already valuable, perhaps 
because it is useful for some non-monetary use like jewellery, or 
because it is directly convertible into an already-existing money, is 
much easier to launch than one that isn't already valuable. Bitcoin 
didn't have the benefit of non-monetary usefulness.




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By way of Timothy May's Cyphernomicon,
 I recently discovered that bitcoin wasn't the first attempt by 
cryptographers to launch an intrinsically worthless digital token into 
positive-value space. Similar bootstrapping attempts occurred back in a 
previous era of digital currency experimentation, the mid-1990s.



In 1993 the extropians—a
 group that believes in the technological possibility of immortality 
(among other things)—set up an experimental market called the Hawthorne Exchange
 where individuals could trade units of reputation. There seems to be 
some crossover between extropians and cypherpunks with the reputations 
of folks like Timothy May and Nick Szabo, both key contributors to the 
Cypherpunks electronic mailing list, being listed on the Hawthorne 
Exchange. Trades were made using the exchange's own native currency 
called thorne, which had a fixed supply. Not only did the 
extropians succeed in generating a positive price for twenty or thirty 
reputation tokens, but by extension the native currency—thornes—was also
 bootstrapped. 



As part of the experiment, people began to sell stuff for thornes, including copies of digital cash papers and old books. They made bets in thornes and even established a U.S. dollar price for the nascent digital currency (it was somewhere between 100 and 1000 thornes per dollar).



The problem with the whole endeavour is that—as Hal Finney would point out
 not long after it had begun—the tokens were essentially worthless. By 
convention each unit was supposed to represent a person's reputation, 
but there was no independent force that could possibly make a token 
correspond to a reputation:


"It is important to understand that Thornes are not like dollars. Unless
 HeX shares can be given a grounding other than the whim of their 
owners, the market will surely collapse, because there is nothing to 
support it."   
Finney would be proven right, since the Hawthorne exchange was shut down sometime in 1994.




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In their next effort the cypherpunks would bootstrap a set of play 
currencies that had been created using a toolkit called Magic Money, a 
digital cash system programmed by the pseudonymous Pr0duct Cypher and made available in February 1994. Here is Pr0duct Cypher in the introduction to the software:


"Now, if you're still awake, comes the fun part: how do you introduce 
real value into your digicash system? How, for that matter, do you even 
get people to play with it?



What makes gold valuable? It has some useful properties: it is a good 
conductor, is resistant to corrosion and chemicals, etc. But those have 
only recently become important. Why has gold been valuable for thousands
 of years? It's pretty, it's shiny, and most importantly, it is scarce.



Digicash is pretty and shiny. People have been talking about it for 
years, but few have actually used it. You can make your cash more 
interesting by giving your server a provocative name. Running it through
 a remailer could give it an 'underground' feel, which would attract 
people.



Your digicash should be scarce. Don't give it away in large quantities. 
Get some people to play with your server, passing coins back and forth. 
Have a contest - the first person who (breaks this code, answers this 
question, etc.) wins some digital money. Once people start getting 
interested, your digital money will be in demand. Make sure demand 
always exceeds supply." 
From the cypherpunks mailing list we learn that over the course of the 
next few months four or five unique tokens were created using Magic 
Money, including Tacky Tokens, GhostMarks, DigiFrancs, and NexusBucks.
 As in the earlier case of thornes, an attempt was made to sell goods 
and services in these new currencies. One poster on the Cypherpunk 
message board offered to pay coders to write software with NexusBucks, 
and another tried to sell GIF art of tacky tokens. 



After a flurry of activity, however, interest died off. "It appears that
 the Magic Money/Tacky Token experiment is not succeeding in producing 
an informal digital currency," wrote Hal Finney in May 1994. "People have offered services in exchange for this money but have had no takers." In a post entitled Why Digital Cash is Not Being Used,
 Tim May blamed the failure of Magic Money on the lack of items to buy 
with tokens and confusion about how to get them and send them. It's 
worth a read.




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No sooner had the Magic Money experiment died when a new new opportunity for bootstrapping digital tokens emerged. David Chaum,
 an early advocate of privacy, had established a company called Digicash
 in 1989 to commercialize the use of blind signature technology in 
electronic currency. In a trial that was first announced in July 1994, 
Digicash offered the first 10,000 applicants one hundred free 
cyberbucks, or e$, up to a maximum issue of one million cyberbucks. 



Despite the fact that these tokens were intrinsically worthless—they had
 neither commodity value nor could they be redeemed into U.S. 
dollars—people soon began to transact with them. On its website, 
DigiCash listed around 100 shops that accepted cyberbucks, including those that sold postcards and various types of information services. Zooko Wilcox-Hearn, who recently founded the anonymous cryptocurrency Zcash, offered to sell his PGP software for cyberbucks. A coding contest
 by the omnipresent Hal Finney offered cyberbucks as a prize and Adam 
Back, a cryptographer who is currently involved in administrating 
bitcoin, sold "export-prohibited" cryptographic t-shirts for a price of e$250. In the same way that a pizza was the first good to be bought with bitcoin, Back's t-shirts may have been the first to be bought with cyberbucks:



i guess those t-shirts were the first pizza. digicash coins however are 
defunct- their SPOF failure is why B-money/bitgold/Bitcoin were p2p. pic.twitter.com/uJ2GIR3HU1

— Adam Back (@adam3us) October 24, 2017




To Digicash's surprise, several primitive financial markets emerged
 to trade cyberbucks for genuine currency. On the Ecash Exchange Market,
 which was hosted on the website of company called Firecloud Solutions, a
 price of around five cents per e$1 was established (see image below), 
effectively valuing the entire market capitalization of cyberbucks at 
$50,000. 





Source: A Common Currency System for Spontaneous Transactions on Public Networks






For those with long memories, the above Ecash market looks very similar to New Liberty Standard's bitcoin-to-paypal market, the first bitcoin exchange that was established in 2009.



The cyberbuck trial did not last. While there was plenty of discussion 
about the topic in 1995, there are only a few mentions of cyberbucks on 
the Cypherpunk mailing list in 1996, but almost nothing in 1997. When I 
asked Zooko if he still had cyberbucks, he told me he had long since lost his. Who knows? They might still be worth a lot as collector's items.




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Like cyberbucks and the other mid-90s experiments, bitcoin began as a 
mere play thing among a small coalition of technologists interested in 
privacy. Why did bitcoin get successfully boostrapped while the others 
failed? How did one form of monopoly money spread over the entire globe 
while the others were never used by anyone other than a small band of 
cypherpunks?



One answer is luck. Perhaps nothing more than a fortuitous flap of a 
butterfly's wings in Brazil set the whole thing off. Another is 
experience. After three failed efforts to bootstrap electronic tokens, 
perhaps the cypherpunk community had developed a better understanding of
 what not to do to get the ball rolling. Hal Finney for one participated in all four digital currency experiments.



The technology was different as well. Because it utilized David Chaum's 
patented blind signature protocol, Magic Money was technically illegal, 
and thus unlikely to spread to more timid adopters. As for cyberbucks, 
once the trial was over the server running the software would have to be
 shut off, at which point there would be no way to verify cyberbuck 
transactions. Knowledge of this imminent shutdown would have handicapped
 the ability of cyberbucks to propagate beyond the core group of 
hobbyists. Bitcoin, on the other hand, used a decentralized (and 
unpatented) method of verifying transactions, so the threat of winding 
up the system was less salient.



I'm not sure these technical factors were as important as the different 
macroeconomic environments in which the various digital currencies were 
issued. Cyberbucks, Magic Money, and thorne all appeared when the global
 economy was humming along and interest rates were high. Owning these 
zero-yielding tokens meant that users had to make a large sacrifice. In 
2009, interest rates around the world had fallen to near zero, so 
holding a digital currency like bitcoin did not involve forgoing much in
 the way of interest income.



If usage of an intrinsically worthless token is to spread beyond an 
inner clique of hobbyists, a whole army of dreamers and speculators has 
to be encouraged to jump onto the bandwagon. What better pool to recruit
 from than the ranks of unemployed and underemployed in the wake of the 
2008 financial crisis? This pool of downtrodden simply didn't exist in 
the humming 1990s. Folks back then had no need for a bubble asset to get
 them ahead—they enjoyed full-time jobs and plenty of opportunity.



Perhaps we were all a bit innocent in the 1990s and didn't understand 
how much our privacy could be invaded by governments and corporations. 
Magic Money and cyberbucks, which promised  protection from these 
threats, arrived too early. When bitcoin was finally introduced, it may 
be that we had all become a bit wiser and thus more willing to endure 
the hassles of switching some of our wealth into cludgy digital 
currency.



Lastly, people weren't upset with the finance establishment back when 
thornes, Magic Money, and cyberbucks were being introduced to the world.
 While recessions had hit in the early 1980s and 90s, they weren't 
accompanied with large-scale financial meltdowns. But in 2009, the 
credit crisis and bailouts were just in the rear-view mirror. Many were 
furious with banksters, and justifiably so. Turning to bitcoin was a 
protest vote.