Cryptocurrency and the DNS

Cryptocurrency has gained considerable attention over the past year thanks in large part to the popularity of Bitcoin.

Introduced in 2008 by the pseudonymous “Satoshi Nakamoto,” Bitcoin combines cryptographic protocols with a clever incentive scheme to create a new, decentralized “currency” not connected to any central bank. Newly minted Bitcoins are awarded to “miners” as compensation for their work after checking that previous Bitcoin transactions have been recorded correctly on a public “block chain.” Bitcoin participants then transfer Bitcoin balances to each other in digitally signed transactions. Although participants are identified only by their numeric Bitcoin “addresses,” all transactions are recorded on the block chain. As a result, the recipient of a transaction can check that the sender is “good for the money,” at least up to the time of the most recently confirmed update to the block chain.

The idea that cryptography might enable a new kind of payment system is fairly old, dating back at least as far as a breakthrough paper presented by David Chaum at the CRYPTO 1982 conference. In Chaum’s system, a central bank issues specially formatted currency values to participants with the property that only the bank can create the values – but even the bank doesn’t know which actual values a participant has received. Participants then exchange these values with each other as payment for goods and services. But because the bank doesn’t know the specific value issued to any given participant, the bank can’t determine, based on later deposits, which transactions have actually taken place between participants – hence the term “digital cash” for this type of system.

Bitcoin is different than a “digital cash” system in several ways: First, it doesn’t have a central bank that issues digital currency values, and Bitcoins are not backed by a physical-world currency. Instead, currency is minted through the Bitcoin protocol itself as compensation for work. Second, no bit strings have actual “value” that could be exchanged as payment or deposited at a bank. Rather, each participant’s balance is determined by the transaction history recorded on the block chain. A participant demonstrates that it is authorized to transfer some of its balance by creating a digital signature, where the public key for verifying the signature corresponds to the participant’s Bitcoin address.

Finally, transactions in Bitcoin are public, but participants are identified only by their Bitcoin addresses. As a result, anyone – including a central bank – can determine which transactions have taken place. However, this determination is at the level of the addresses involved. No one necessarily knows the specific individuals or organizations behind the addresses, unless they choose to identify themselves.

By the time Chaum published his paper it was already becoming clear that the Internet (then called the “ARPA Internet” or ARPANET) could eventually have a profound impact on commerce. Ronald Rivest, Adi Shamir and Leonard Adleman, in their 1978 paper that introduced the RSA cryptosystem envisioned, “The era of ‘electronic mail’... may soon be upon us.” They also stated that the digital signature capability they described (motivated by Whitfield Diffie and Martin Hellman’s foundational paper two years prior) would have “obvious applications in ‘electronic mail’ and ‘electronic funds transfer’ systems.”

Nearly four decades later, electronic mail, electronic funds transfer and many other forms of e-commerce are nearly ubiquitous, with cryptographic protocols playing an essential role. However, that role has been limited to providing digital versions of security services that historically were achieved by physical means. Cryptographic protocols help protect the exchange of credit card information between consumers and merchants, and between merchants and banks, that in past generations would have been delivered on paper charge slips. They likewise protect electronic funds transfers that otherwise might have been done via fax or over the phone. Although at vastly higher volumes, the underlying transactions are substantially the same as in past generations, involving transfers of value in conventional currencies issued by central banks.

That’s where the emerging cryptocurrency ecosystem takes a leap forward: The ecosystem itself creates the currency. The central bank is replaced by the decentralized crowd of miners; and the banking system’s private ledgers are replaced by the public block chain.

In addition to the more infrastructure-oriented information mentioned in this article’s sidebar, Bitcoin-related domain name activity more generally continues to increase. In the first year following the publication of Satoshi Nakamoto’s paper, only eight domain names containing the string “bitcoin” were registered, and in the second year only 295. The number of registrations has grown steadily since then with more than 15,000 in the .com and .net domains from January to August 2014 alone. This rate is on par with the pace in 2013 that produced more than 23,000 registrations. High-value domain name sales have been taking place as well, with BTC.com selling for $1 million.

Although it’s still unclear how much impact Bitcoin and other current cryptocurrency systems will ultimately have on the “real world” of finance, what is clear already is that Internet-based applications – enabled by ubiquitous networking and computing – are a powerful force for financial innovation. Whether a block-chain-based decentralized cryptocurrency, digitally signed transactions attached to an account at a central bank, or something else entirely, the future of money is in Internet-based transactions. It will be interesting to see where the emerging blends of new currencies and old, decentralized and delegated, anonymous and branded, take us next.

Commonalities with the DNS

Around the same time that Diffie, Hellman and RSA introduced their cryptosystems, and Chaum pioneered digital cash, Paul Mockapetris set forth the design of the Domain Name System, described in RFC 882. E-commerce as we know it today may still have been more than a decade away, but Mockapetris foresaw that any application in the rapidly expanding Internet would need “a consistent name space which will be used for referring to resources,” one that “must be maintained in a distributed manner.” The result was a system that is both centralized and distributed. The central root and consequently the single global name space of DNS ensure consistency, but the name space can be delegated into independent subspaces, operated by multiple parties all over the world.

That global, distributed name space has proven to be fundamental in numerous Internet applications, and shown again to be so in the cryptocurrency ecosystem, where although the currency itself requires no central authority, the operation of the ecosystem is based throughout on navigation to resources through DNS. For example, the Bitcoin Community Foundation makes its home page at bitcoin.org; system specifications are maintained at bitcoin.it; source code and improvement proposals are distributed via github.com; and block chain information is made available at blockchain.info. DNS is also the mechanism by which nodes in the Bitcoin peer-to-peer network discover each other via the “bitcoin-seeder” network crawler. Moreover, even though Bitcoin addresses are anonymous, any organization that’s invested in building a brand will draw people to its website, identified by domain name, if it wants to accept Bitcoin payments – rather than just advertise a numeric Bitcoin address. The Bitcoin address, like the website’s IP address, remains behind the scenes.

Finally, although source code and other documentation could conceivably be published by putting “anchors” into the block chain (and there are promising proposals along these lines), the reliable and confident way to make Bitcoin resources available to the public today is to build on what the public already trusts. People can then navigate to the information in which they’re interested the same way they get to everything else on the Internet: domain name to IP address to resource.

Even a decentralized ecosystem needs a trusted, neutral way to connect back to the rest of the world.