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The First Rise of Bitcoin

Graphics Cards, Pizzas, and Free Bitcoins

The History of Bitcoin's Creation

Graphics Cards, Pizzas, and Free Bitcoins

  • Mining by Graphics Processing Unit
  • Satoshi's Bitcoins
  • The Bitcoin Pizza Day
  • Gavin Andresen and the Bitcoin Faucet
  • A Spring Full of Foundational Events
In the previous part, we explored how Bitcoin came into existence, how it was introduced to the public, and how it was economically initiated. In the spring of 2010, as Bitcoin commerce was beginning to bloom, Satoshi Nakamoto and the few people supporting him were determined to keep the flame alive. Fortunately, other individuals joined the effort, notably miner Laszlo Hanyecz and developer Gavin Andresen, who stood out for their actions.
In this chapter, we will examine the first deployment of mining by graphics processing unit (GPU), Satoshi Nakamoto's fortune, the first purchase of a physical good with bitcoins, the establishment of a bitcoin faucet giving out free units, and the evolution of the software and network before Slashdot.

Mining by Graphics Processing Unit

The increasingly high demand for bitcoin was accompanied by a gradual increase in mining activity on the network. Throughout 2009, the network's difficulty was at the minimal floor of 1, which required all nodes to perform about 4.3 billion calculations to mine a block. However, in December 2009, this changed thanks to the adjustment algorithm, which increased the difficulty factor from 1 to 1.18.
Satoshi Nakamoto was very concerned about this increase in difficulty and maintained a history on the forum starting in February 2010. Here is what it looked like:
Despite this enthusiasm about the increase in computing power on the network, Satoshi was nevertheless looking to slow down the specialization of mining to favor the distribution of units. Until then, miners used their central processing units (CPUs) to extract new bitcoins. However, these processors proved inefficient for performing repetitive operations, compared to graphics processing units (GPUs), which are far more suited to this type of repetitive calculation. Consequently, everyone, including Satoshi himself, knew then that this evolution was inevitable. On December 19, 2009, he stated as follows: "We should have a gentleman's agreement to postpone the GPU arms race as long as we can for the good of the network. It's much easier to get new users up to speed if they don't have to worry about GPU drivers and compatibility. It's nice how anyone with just a CPU can compete fairly equally right now."
However, a few months later, Pandora's box was opened. The troublemaker is Laszlo Hanyecz, a 28-year-old American developer of Hungarian origin, living in Florida. He discovered Bitcoin in April 2010. On the 9th, he acquired 3,300 bitcoins from NLS for about $20, then tested the system by making a few transfers. On the 18th, he attempted to congest the network by multiplying transactions from his public address, but it held up.
Laszlo Hanyecz with his son in May 2018 (source: The Telegraph)
Subsequently, he adapted the software code to make it work on the Mac OS X operating system. Then he worked on optimizing mining by using the OpenCL environment, which allows the involvement of the GPU in generating bitcoins. On May 10, he published his executable and offered to write patches to enable other miners to do so. This optimization quickly allowed him to occupy a significant place in block production. At the end of April, Laszlo contacted Satoshi to ask for his opinion, but the latter only responded on May 17th. The creator of Bitcoin then asked him to slow down his operations so that mining remains accessible to the greatest number:
"A big attraction to new users is that anyone with a computer can generate some free coins. When there are 5000 users, that incentive may fade, but for now, it's still true. GPUs would prematurely limit the incentive to only those with high-end GPU hardware. It's inevitable that GPU compute clusters will eventually hog all the generated coins, but I don't want to hasten that day. (...) I don't mean to sound like a socialist, I don't care if wealth is concentrated, but for now, we get more growth by giving that money to 100% of the people than giving it to 20%. Moreover, the longer we can delay the GPU arms race, the more mature the OpenCL libraries get, and the more people will have OpenCL compatible video cards."
Laszlo did not heed this warning and continued to mine blocks with his graphics card, generating tens of thousands of bitcoins in the following months. However, GPU mining did not become widespread until October.

Satoshi's Bitcoins

This rise in mining also had a significant consequence: Satoshi stopped producing blocks. Since the network's launch, he had been mining to ensure a sufficient confirmation pace and an acceptable level of security. With the new power deployed, he could therefore abandon this task and let other network members benefit from the entirety of the created bitcoins.
Satoshi's mining activity has a distinct pattern, making it possible to identify the blocks he likely found with a few false positives. Developer Sergio Lerner highlighted this mining pattern in 2013 and named it the Patoshi Pattern.
The Patoshi Pattern between blocks 0 and 50,000, as observed on the website satoshiblocks.info: each point corresponds to a block. The blue lines are formed from Satoshi's blocks, and the other lines represent the output of other miners.
According to a study by Whale Alert published in 2020, Satoshi mined about 22,500 blocks and thus accumulated 1,122,693 bitcoins, more than 5% of the planned 21 million units. For much of 2009, the network relied on the computing power of its founder. This dependence was illustrated in August 2009, the worst period in mining activity, and it coincided with a "pause" time for Satoshi, who likely monitored his machines less. Indeed, during this August, only 1,564 blocks were produced out of the 4,464 expected, corresponding to an average time of 28 minutes and 30 seconds.
With the increase in computing power in the fall of 2009, the proportion of Satoshi's computing power relative to the total network power gradually decreased. It went from 75% in March 2009 to 60% in September, then down to 15% in December, and reached 0% in May. Below is a graph made by Organofcorti in 2014:
Moreover, Satoshi's decline in mining dominance is not merely passive: he slows down his production during the same period. Indeed, Satoshi's stated goal is for everyone to participate: he does not mine for financial gain, but to ensure the network's operation until incentives take effect. Thus, he reduces his hash rate (the number of calculations performed each second) three times during this mining period: the first time from 4.5 to 2.5 MH/s in June 2009, the second time from 2.5 to 1 MH/s in October, and the third time from 1 to 0 MH/s in May 2010. Here is a chart of his hash rate evolution during this period (Organofcorti):
Satoshi's mining is therefore decidedly altruistic, as Jameson Lopp points out. When he stops mining on May 3, 2010 (his last block is block 54,316), it constitutes another achievement in the slow development of Bitcoin: the takeover of transaction confirmation by economic actors.

The Bitcoin Pizza Day

A foundational event also marks May 2010: the first purchase of a physical good with bitcoins. Laszlo Hanyecz takes the first step. Having accumulated over 20,000 bitcoins through his algorithm, he seeks to reinject them into the economy by obtaining pizzas. On May 18, he writes the following announcement on the forum:
"I'll pay 10,000 bitcoins for a couple of pizzas... like maybe 2 large ones so I have some left over for the next day. I like having left over pizza to nibble on later. You can make the pizza yourself and bring it to my house or order it for me from a delivery place, but what I'm aiming for is getting food delivered in exchange for bitcoins where I don't have to order or prepare it myself, kind of like ordering a 'breakfast platter' at a hotel or something, they just bring you something to eat and you're happy! (...) If you're interested please let me know and we can work out a deal."
After four days, this offer was accepted. A young Californian named Jeremy Sturdivant accepted the exchange on the IRC instant messaging service.
Jeremy Sturdivant in May 2018 (source: The Telegraph)
On May 22, he ordered two pizzas from Papa John's, delivered to Laszlo in Jacksonville, Florida. He received 10,000 bitcoins in exchange, worth about $44 at the Bitcoin Market rate. Here is a photograph of these two pizzas, shared by Laszlo himself:
This concludes the first purchase of a physical good with bitcoins, even if this purchase is indirect. Laszlo is congratulated by Martti Malmi, who writes that "a big step has been taken." NLS also adds a positive comment on this matter.
On June 12, Laszlo Hanyecz reiterates his offer by writing on the forum:
"This is an open offer by the way... I will trade 10,000 BTC for 2 of these pizzas any time as long as I have the funds."
He thus carried out several other transactions of the same type, until August 4th when he wrote that he couldn't really "afford to keep doing this" since he could no longer "generate thousands of units per day." The reason: the price increase brought on by the influx from Slashdot on July 11th, which also earned him the mocking remarks of forum members, who implied that he would have been better off keeping his bitcoins. A few months later, in November, as the price of bitcoin hovered around 25 cents, the user ribuck wrote in an almost prophetic manner: "Will this eventually become the world's first million-dollar pizza?"
Nevertheless, the increase in cryptocurrency's purchasing power did not detract from its symbolism. The Bitcoin community commemorates this date every year as Bitcoin Pizza Day.

Gavin Andresen and the Bitcoin Faucet

This period also saw the arrival of a key figure in the history of Bitcoin: Gavin Andresen, a 44-year-old developer born in Australia who acquired U.S. nationality in 2004 and was living in Amherst, Massachusetts at the time. Returning from a trip to Australia and temporarily unemployed, he discovered Bitcoin at the end of May through an article by Neil McAllister published on InfoWorld. This article presented Satoshi Nakamoto's project as an "open-source innovation."
Gavin Andresen in Townsville, Queensland, Australia (source: CIO archive)
Curious and inventive, he quickly began working on a personal project: a "Bitcoin Faucet" which gives bitcoins to anyone who requests them. On June 11th, he launched his service and presented it on the forum as follows: "For my first Bitcoin programming project, I decided to do something that sounds really dumb: I created a website that distributes Bitcoins. (...) Why? Because I want the Bitcoin project to succeed, and I think it has a better chance of succeeding if people can get a handful of units to try it out."
Satoshi reacted favorably to the launch of this service, even though he didn't notice it immediately. A week later, on June 18, he congratulated the creator by writing that it was an "excellent choice for a first project" and that he had "planned to do exactly the same thing if nobody else did it, so when it gets too hard for mortals to generate 50BTC, new users could get some coins to play with right away."
Gavin Andresen's contribution didn't stop there. He took a deep interest in how Bitcoin works and set out to dissect the code. He discovered the built-in script system in the protocol, something he quickly shared on the forum. He expressed his apprehension about this feature, as it reduced the system's security ("complexity is the enemy of security") and made developing a second software implementation more difficult. Satoshi explained the reason behind integrating this mechanism, which he called Script:
"The nature of Bitcoin is such that once version 0.1 was released, the core design was set in stone for the rest of its lifetime. Because of that, I wanted to design it to support every possible transaction type I could think of. (...) The solution was script, which generalizes the problem so transacting parties can describe their transaction as a predicate that the node network evaluates. The nodes only need to understand the transaction to the extent of evaluating whether the sender's conditions are met."
Gavin also became involved in the software development by implementing automatic startup on boot for Linux, focusing on the API (he would be credited for its improvement in version 0.3.3), and participating in the deployment of the test network (which he conceived on June 9). He would privately exchange ideas with Satoshi, gradually becoming his right-hand man, as Martti Malmi was very busy with his new full-time job.

A Spring Full of Foundational Events

The spring of 2010 was a period rich in foundational events. First, at the end of April, developer Laszlo Hanyecz developed GPU mining, an optimization that Satoshi opposed in the short term (even though he recognized its inevitability in the long term). This development coincided with Satoshi stopping the production of blocks, probably estimating that the network's hash rate was sufficient. Then, May 22nd was marked by the exchange of the famous pizzas between Laszlo Hanyecz and Jeremy Sturdivant, which constituted the first purchase of a physical good with bitcoins. Finally, Gavin Andresen arrived in June, who created the bitcoin faucet and quickly got involved in the software development. All these elements showed an encouraging progression of the economy around Bitcoin.
However, by the end of June, activity on the network had remained quite modest. There were a few new users, and the monetary phenomenon's flame was enough not to go out. On June 30, the cypherpunk James A was on the Bitcoin-list mailing list. Donald (who did not seem to have followed the latest advancements, nor was aware of the forum's existence) declared that "Bitcoin [was] kind of dead." Even though he was wrong, his comment revealed a glaring lack of communication: too few people knew about the project, and more effort was needed. Bitcoin needed "an ecology of users to be useful," and this critical mass was not there yet. An event would move in this direction two weeks later, which we will address in the next chapter. (original: "Yes - bitcoin kind of went dead. The trouble is that bitcoin, to be useful, needs an ecology of users.")
Quiz
Quiz1/5
Who had the idea to set up a test network to avoid harming the main Bitcoin network?