The Pioneer Economy

In July 2009, Satoshi Nakamoto put a practical problem to Martti Malmi: Bitcoin needed something people could use it for. Malmi's response considered an exchange that would buy and sell bitcoins for euros and other currencies. Convertibility, he argued, would help newcomers accept a money they could turn into something already familiar. [1]

The correspondence places exchange near the beginning of the experiment. A prospective user needed more than an explanation of how transactions worked. Someone had to supply coins, accept them back, or offer something worth buying.

Bitcoin's design addressed a different question: how a network could establish a transaction history without relying on a central institution to prevent double spending. That achievement did not recruit the other party to a trade or establish the price. [2]

Malmi's proposal connected these problems. A person who could exchange bitcoins for euros had a reason to consider accepting them before a large shopping economy existed. An exchange, in turn, needed customers willing to place orders and money available to meet them.

The economy would have to be assembled around a network that could already move its coins.

On March 17, 2010, the operator of BitcoinMarket reported a modest beginning: nine people had registered, three others had deposited funds, and the operator's own deposit brought the participating group to four. The service had apparently made its first real trade around noon. [3]

The account called dwdollar had announced work on the exchange in January. Building a market involved addresses, connections, order handling, and finding people prepared to use the service. A working page and a population of traders were separate accomplishments. [4]

Later that month, SmokeTooMuch offered 10,000 BTC at auction with a $50 starting bid. Replies offered less. On April 7, the seller reported that the auction had ended without a qualifying bid or a transfer. [5]

The unsuccessful sale is as revealing as an executed trade. People could disagree about value, quantity, and terms. A quoted rate did not guarantee that a seller could dispose of a particular holding at that price. A lower offer demonstrated some demand without satisfying the person selling.

An exchange gave these disagreements a place to meet. Buyers could state what they would pay; sellers could state what they required. A trade occurred where the terms matched. Until then, the apparent value of a balance depended partly on finding the next person willing to take it.

This was the work behind an emerging price: arranging an actual exchange between people with different expectations.

Much of this work happened in the forum now known as BitcoinTalk. A thread could begin as an advertisement and become a negotiation, a help desk, or an argument about whether the service should be trusted. Readers could watch operators explain decisions and customers challenge them.

Outside attention became part of that shared activity. In November 2010, Jeff Garzik began collecting press references in a forum thread. Stephen Gornick's April 2011 roundup placed coverage alongside payment services, merchant initiatives, regional projects, IRC channels, and work on multilingual resources. [6] [7]

The forum was central to this public life, connected to other places where people worked and talked. IRC offered live conversation. Wikis collected information. Mailing lists and correspondence carried technical discussion. Participants moved between these spaces rather than inhabiting one complete institution.

Trading arrangements also developed across them. In October 2010, nanotube announced an IRC marketplace, bitcoin-otc. A later announcement introduced a web of trust, and discussion addressed optional PGP identity verification. [8]

An order book helped someone find a trade. Reputation addressed another problem: whether the counterparty would perform. Neither a pseudonym nor a cryptographic identity established that a person was honest, but continuity made previous conduct easier to connect to the next transaction.

Recruiting users required coins to try. In June 2010, Gavin Andresen announced a faucet offering five bitcoins per customer. The discussion soon addressed donations, abuse, and access through Tor. Even a giveaway needed funding and operating decisions about whom to let in. [9]

These conversations were part of the economic machinery. People used them to attract customers, make commitments, judge one another, and respond when arrangements failed. For a newcomer, learning to use Bitcoin could also mean learning whom to ask.

In December 2010, a user named todu asked whether something was wrong. The Bitcoin application had run on a Windows laptop for 708 hours without generating coins. Replies discussed the limitations of the equipment and the cost of keeping it working. [10]

The question exposed a gap between a computer performing work and its owner receiving a reward. Mining was a competition. A machine could participate for a long time without finding a block, while electricity and time continued to be spent.

Tools that changed the competition had an economy of their own. In September, puddinpop credited a contribution from jgarzik with enabling the release of CUDA mining source code. Funding helped make a productive tool available to other users. [11]

Pooling offered another approach. In a November discussion, Slush described the frustration of trying to find a block with three CPUs and proposed cooperative mining. Combining work and sharing rewards offered participants a way to receive smaller payments more regularly. [12]

Pooling changed the distribution of waiting. It did not make an inefficient machine consume less electricity or guarantee a profit. It also introduced questions about measuring contributions, distributing rewards, and relying on the pool's arrangements.

Mining was becoming a livelihood calculation. What equipment could someone afford? How much did power cost? How long could they wait? And after receiving bitcoins, what could they do with them?

The early shopping economy included the unfinished work of marketplaces. In July 2010, BiddingPond's auction-site discussion moved from an announcement to questions about bids, shipping, bugs, and how the operator would earn money. Building somewhere to list goods was only part of arranging a sale. [13]

Alpaca socks gave this world a memorable product. A later account described David Forster buying socks from his parents' farm for dollars and reselling them for bitcoins. It offered a way to participate through merchandise rather than mining. [14]

A June 2011 forum promotion discussed the sock offer and international shipping; its operator reported that the deal sold out. Customers and organizers were working through ordinary retail questions in public. [15]

In August, DrHaribo supplied the customer's perspective. He said he had bought alpaca socks the previous week and wanted to try buying beef jerky. Arranging purchases by email frustrated him. He asked whether merchants had a payment processor and shopping-cart solution. [16]

The complaint moved the story beyond the novelty of what could be bought. A buyer needed to find a seller, understand the offer, make contact, and complete an order. Enthusiasm could motivate someone to tolerate that work. It could also make the inconvenience more obvious.

The socks could be worn. The next challenge was making the purchase feel ordinary.

A service could accept bitcoins and still depend on a bank or payment company for the other side of its business. The network's availability did not ensure that an exchange could deliver dollars to a customer.

In October 2010, Mt. Gox's operator reported that PayPal had dropped its account following chargebacks and frozen funds. Users asked about withdrawals; the operator described efforts to provide another route. [17]

CoinPal experienced a similar vulnerability. On April 30, 2011, its operator, mndrix, reported that PayPal had frozen his account and that the service could not continue as before. Replies described cash-out needs, an unsettled order, and searches for alternatives. The operator's explanation preserved his account of the dispute; the customers' questions showed the immediate practical consequences. [18]

By February 2012, TradeHill was announcing a suspension of trading and deposits. Jered Kenna cited licensing requirements, bank-account closures, Paxum's departure, and a dispute with another payment processor. He said client funds would be returned. [19]

Each episode exposed several layers of a transaction. A trade changed balances inside a service. Withdrawing bitcoins required that service to send them. Receiving conventional money required access to another institution's payment system. Difficulties at one layer could interrupt the customer's plan even while Bitcoin continued producing blocks.

For someone paying household bills or buying equipment, the exit route mattered as much as the entrance. A new monetary network still had to connect to the money other people required.

In the early Bitcoin economy, a buyer might have to search a forum thread, contact a merchant, or arrange a trade with a stranger. Silk Road brought many of those separate steps together. Operating through the Tor network from 2011 until its October 2013 shutdown, it offered a recognizable marketplace: product listings, vendors, customer feedback, a payment system, and a mechanism for resolving disputes. Its principal trade was illegal drugs. Bitcoin was the currency used to pay for them. [20] [58]

That combination made Silk Road more consequential to Bitcoin's early commercial history than an isolated demonstration that someone could buy an unusual item. A purchaser needed a way to obtain bitcoins; a seller needed somewhere to advertise and a means of being paid; the marketplace needed enough customers and sellers to make each side's participation worthwhile. Silk Road assembled those relationships inside a service that people returned to use. The illegal nature of the trade was central to its appeal and its consequences, not an incidental feature of an otherwise ordinary shop. [20] [58]

A market takes shape

Silk Road's storefront was accessed through Tor, which helped conceal network locations. That was different from Bitcoin's role. Bitcoin supplied the payment currency; it did not provide the listings, screen for sellers, settle disputes about parcels, or determine whether a promised delivery had arrived. Those tasks belonged to the marketplace and its participants. [20] [58]

The service combined features familiar from other online markets with arrangements adapted to its users' desire for anonymity. Seller reputation and customer feedback allowed earlier interactions to inform later purchasing decisions. Escrow meant that coins could be held within the marketplace's system while a transaction awaited completion. The operator collected a commission for facilitating commerce. These arrangements helped strangers transact, but they also concentrated control over balances, information, and disputes in the hands of a central operator. [20] [58]

A successful Bitcoin transfer was not the same as a successful purchase. Buyers still depended on sellers to send the goods described; sellers depended on marketplace rules and access to their funds; both sides depended on the continued operation of the website. Silk Road made this supporting commercial machinery unusually visible because it could not rely on the ordinary legal remedies of conventional retail trade.

What observers could measure

Nicolas Christin studied Silk Road through publicly observable listings collected from late 2011 into 2012. His analysis covered more than 24,400 distinct items and found that controlled substances and narcotics dominated the available goods. The market was not a fixed collection of established merchants: many listings and sellers disappeared after comparatively short intervals, while a core of 112 sellers remained present throughout the study's measurement period. [20]

From observed listings and assumptions explained in the study, Christin estimated seller revenue at slightly more than $1.2 million per month, with approximately $92,000 per month flowing to the marketplace operator as commissions. These were estimates for an observed period, not a ledger of every completed sale or a lifetime total. They nevertheless documented sustained commercial activity on a scale quite different from the tentative forum auctions and small shops that had preceded it. [20]

Later investigators obtained a different kind of evidence. In a 2022 sworn affidavit drawing on recovered Silk Road server records and court material, an IRS-CI agent reported approximately 1.5 million marketplace transactions involving roughly 9.9 million BTC between February 2011 and October 2013. Those are retrospective, full-period forensic figures; they should not be read back into what a 2012 observer could have known. Nor do they establish Silk Road's share of all Bitcoin commerce. [59]

Who held the trust?

The marketplace depended on Bitcoin, yet much of the trust surrounding a purchase was entrusted to people and an organization rather than to the network. Escrow required the operator to control funds within the service. Feedback required records that buyers believed and sellers could accumulate. Disputes required decisions. The reputation of a seller, the solvency or honesty of the operator, and the delivery of a parcel were not questions that a blockchain could answer.

This had a counterpart in the lawful early economy. A BiddingPond listing, an emailed order for alpaca socks, and a hosted Bitcoin balance all required arrangements beyond sending coins. Silk Road organized comparable commercial responsibilities on a far larger illicit stage. The parallel explains a problem of market design; it does not make the businesses or their consequences morally equivalent. [13] [15] [16]

A growing economy meets the law

Silk Road brought harms that no account of early Bitcoin adoption should treat as background. Its principal trade was illicit narcotics. Vendors used the marketplace to sell drugs, and its design sought to shield participants from identification and law enforcement. The resulting activity drew criminal investigations and shaped the public association between Bitcoin and illegal commerce. [20] [58]

Ross Ulbricht, whom U.S. authorities identified as the site's creator and operator, was arrested in San Francisco on October 1, 2013. The original Silk Road site was taken down in early October. Investigators seized servers, transaction records, and bitcoins connected to the operation. A payment network capable of continuing without Silk Road did not keep this particular marketplace, its custody arrangements, or its records beyond the reach of investigators. [50] [60]

The shutdown did not erase the significance of the commerce that had occurred. It showed how much an early Bitcoin economy could organize around one central service—and how much depended on the people controlling that service. Silk Road had given Bitcoin a persistent commercial use while exposing the risks, illegal purposes, and enforcement consequences of the institutions built around it. The currency's payment rules alone had settled none of those questions.

On June 13, 2011, the account allinvain reported a loss of 25,000 BTC and described a compromised computer. The thread records the owner's distress and efforts to understand what had happened. It also exposed a hard limit of backups: restoring an old wallet could not reverse coins already spent by someone else. [21]

Holding keys placed an important form of control with the user. It also placed security work there. Software, storage, backups, and access to the machine became part of protecting money.

A hosted wallet moved some of that work elsewhere. The balance on its website represented a relationship with the operator, who controlled the service and its ability to send coins. MyBitcoin's customers confronted this dependence in the summer of 2011. Forum discussions disputed recovery and the proposed partial refund. [22]

On August 19, 7iain7 said losses through two MyBitcoin accounts had led him to leave Bitcoin and sell his mining graphics cards. The post cannot tell us how many others left. It preserves one person's account of deciding that participation was over. [23]

An exchange balance had its own complications. After the June 2011 Mt. Gox disruption, a customer and the operator published conflicting accounts of extraordinary trades and their treatment. Their dispute concerned the exchange's records and obligations; reversing entries in those records was different from reversing Bitcoin's blockchain. [24]

The choices were consequential. A user could take on the burden of keeping keys or depend on someone offering to manage it. Neither arrangement removed the possibility of loss. The people who departed belong in the history of the economy as much as those who continued building it.

Bitcoin Savings and Trust offered a reason to hand coins over rather than keep them idle. Its operator used the name pirateat40 and described profitable Bitcoin dealings. The SEC's later complaint reconstructed forum solicitations, questions about the business, and assurances of limited risk. Promised returns reached seven percent a week. [25]

The offer asked investors to believe something beyond the network's records. A transfer could show that an address had received bitcoins. It could not establish the operator's customers, trading profits, liabilities, or ability to meet future withdrawals.

On July 23, 2013, the SEC charged Trendon Shavers and Bitcoin Savings and Trust with operating a Ponzi scheme. The agency alleged that new investments funded purported returns and that coins were diverted for personal use. [26]

The case joined an unfamiliar payment technology to a familiar financial problem. High returns and accounts of previous payments did not explain where continuing profits came from. Paying an earlier participant could strengthen confidence while leaving that question unanswered.

These distinctions matter when looking back at the forum. It held questions and objections as well as solicitations. Its capacity to make a promise visible did not make that promise true. The same place that helped strangers find one another could carry claims they lacked the means to verify.

Organizations also faced decisions about what participation implied. In June 2011, EFF explained why it was stopping Bitcoin donations, citing legal uncertainty, questions about using the funds, and concern that acceptance could be mistaken for endorsement. A recognizable name could open a door and later close it. [28]

In September 2012, Gavin Andresen announced the Bitcoin Foundation. He described an organization modeled on the Linux Foundation and invited members to help shape its work. Replies welcomed the effort and questioned whether it would concentrate influence. Public representation was becoming organized, and its authority was immediately contested. [29]

Maintaining compatible software posed another kind of coordination problem. Version 0.8.0 was released in February 2013. On March 11, differences in how versions handled a block produced competing chains. [30] [31]

The post-mortem records a response involving developers, pool operators, exchanges, and a payment processor. BTC Guild and Slush changed their mining software to help restore a common chain. The choice sacrificed work their pools had performed on the competing branch. Services suspended affected payment or deposit functions while the incident was resolved. [31]

The response made the economic stakes of software compatibility visible. A merchant needed confidence about a payment. An exchange needed a dependable deposit history. Miners had invested work in blocks whose treatment now mattered to their income.

An organization could raise funds or speak in public. It could not settle those technical and economic questions simply by claiming to represent Bitcoin. Resolution depended on specific actors taking actions that other participants could recognize and follow.

The system's operation included this work of maintenance: identifying trouble, reaching people who could respond, and restoring the conditions under which everyone else could transact.

In August 2012, the ASICMINER discussion offered a different way to participate in mining. Instead of buying a machine, investors could acquire shares associated with a venture developing specialized equipment. Shares were offered through GLBSE, an early Bitcoin securities venue. [32]

The replies read like a small capital market taking shape. Participants asked about schedules, ownership, discounts for large purchasers, and what would happen to unsold shares. The issuer answered questions about trust by invoking previous activity and identity checks. [32]

The proposed relationship extended beyond the purchase transaction. A holder depended on people developing and operating equipment, accounting for costs, maintaining ownership records, and making distributions. The blockchain could carry a payment without independently establishing those obligations or ensuring their fulfillment.

GLBSE's closure later that year exposed the importance of the records. Contemporary reproductions of its notices distinguished users' bitcoin balances from their continuing relationships with asset issuers. Claims instructions asked for information that could reconnect holders and the businesses behind their assets. [33]

A trading venue could close while an underlying business still existed. Conversely, recovering a bitcoin balance did not automatically settle an investor's rights in a venture. Several responsibilities had been combined in one service and now had to be separated.

This activity expanded the meaning of Bitcoin commerce. People were using coins to finance hoped-for production and trading claims on its future results. Assessing those claims required knowledge of businesses, people, and records that could not be read from a transaction alone.

The economics of a mining machine began before it arrived. A customer paid for an expected capability and waited while the conditions under which it would earn coins could change.

In June 2012, Butterfly Labs preorder discussions argued over delivery targets and quoted refund terms. Participants also considered the advantage early recipients would enjoy before competing machines increased the difficulty of earning rewards. A promised specification could not answer when someone would actually begin mining. [34]

A January 2013 forum guide compared advertised hardware and warned that ASIC equipment was not yet shipping. Its confident predictions are evidence of expectations, rather than a dependable account of what every purchaser would earn. [35]

On January 20, Avalon announced shipments. A February discussion seeking receipt reports also preserved customers' uncertainty about tracking and arrival. Shipment, delivery, and useful operation were separate stages in the investment. [36] [37]

The subsidy was changing too. In November 2012, participants celebrated the first halving, when the block subsidy fell from 50 BTC to 25. The smaller subsidy entered a calculation already shaped by competition, power, and equipment costs. [38]

Some people tried to influence the organization of mining itself. A January 2012 thread offered voluntary subsidies to P2Pool miners, encouraging participation in a distributed alternative to conventional pools. Offers of support met practical questions and a preference, from one respondent, for an already familiar pool. [39]

These were choices about where work would go and who would bear uncertainty. Hardware buyers considered speed and delivery. Pool participants considered rewards, familiarity, and control. The equipment race and the effort to distribute mining differently were both part of the pioneer economy.

The checkout problem DrHaribo had described in 2011 was receiving practical answers. BitPay's September announcement of a mobile checkout pilot showed work on making a purchase easier for merchants and customers. [40]

WordPress gave a fuller account when it added Bitcoin payments in November 2012. It described conventional payment restrictions as an obstacle to bloggers buying upgrades. Bitcoin offered another route. BitPay would receive the bitcoins and send WordPress dollars. [41]

The announcement also addressed the details of selling: some purchases were excluded, digital upgrades could be provided before a blockchain confirmation, and refunds would remain available through the processor. These were operating choices about customer experience and risk. [41]

In February 2013, Reddit added Bitcoin support for Reddit Gold. Yishan's explanation in the announcement discussion was direct: the company accounted in dollars, paid expenses in dollars, and used Coinbase to convert the payments. He also described the technology as experimental and reserved the possibility of changing the implementation. [42]

For a buyer, either service offered somewhere useful to spend. For the merchant, the processor reduced the need to manage a Bitcoin treasury. Acceptance could expand without requiring both sides to want the same currency at the end of the sale.

Acquiring coins still took work. Coinbase's October 2012 U.S. bank-service announcement described verification, initial daily limits, and transfers normally taking several business days. [43]

A smoother purchase therefore rested on several connected arrangements. The customer needed coins; the checkout needed a payment; the processor needed to settle with the merchant. Convenience made those stages less visible to the buyer while giving the businesses behind them more responsibility.

In February 2013, Brewster Kahle asked people to donate bitcoins to the Internet Archive. Some employees had elected to receive part of their April pay in the currency. Donations could help supply the coins. [44]

The proposal joined two sides of an economy: people willing to give and people willing to receive. Spending required another connection. Kahle's March instructions provided one through an honor-based conversion box at the Archive's Friday lunches. He put up cash and bitcoins. Users could calculate an exchange and use a nearby computer and cashbox, with a small contribution requested to cover mistakes or losses. [45]

By April, Kahle reported employees participating, food and drink purchases, movie admissions, and small debts settled in Bitcoin. In a reply, he wanted the coins to circulate nearby before someone took them back to an exchange. [46]

This was a bounded experiment among people and places willing to try it. Its modest scale made the relationships visible. A donation could support pay, pay could support a purchase, and a conversion arrangement could help someone enter or leave the circuit.

Other efforts approached participation from different directions. Bitcoin100's November 2011 discussion collected charitable pledges and considered making acceptance easier. LocalBitcoins' June 2012 thread worked through how people could find nearby cash traders, with users requesting better location and currency handling. [47] [48]

Each arrangement addressed a point where a willing participant could get stuck. Someone had coins but needed cash, wanted donations but lacked a convenient method, or received Bitcoin pay and needed somewhere to spend it. Connecting those circumstances gave the currency a place in daily activity.

In March 2013, FinCEN distinguished people obtaining virtual currency to purchase goods or services from administrators and exchangers whose activities could make them money transmitters under U.S. regulations, subject to applicable limitations and exemptions. The guidance attached obligations to particular activities within the developing economy. [49]

The distinction had practical force. Buying something and running a service that moved value for others were different roles. A business could encounter requirements that an individual spending coins did not share.

The October 2013 shutdown of Silk Road brought the government's reach into a Bitcoin-based marketplace into full public view. As examined in Chapter 7, authorities pursued an illicit enterprise organized around Tor, bitcoins, operators, vendors, and centralized records. The seizure of its website and associated assets made clear that a decentralized payment network did not place the businesses using it outside criminal investigation and legal process. [50] [60]

In November, the Senate's “Beyond Silk Road” hearing placed potential benefits and risks in the same policy discussion. The prepared opening statement asked what virtual currencies were and how government should respond. Formal attention brought questions rather than a general endorsement. [51]

China's December notice drew another set of boundaries. It restricted financial and payment institutions' Bitcoin activities and specified obligations for trading websites. Its accompanying official explanation also described individuals' freedom to participate in commodity trading at their own risk. The policy treated institutional services differently from private participation. [52]

The borderless movement of coins now met increasingly explicit rules around the services people had built. Banking access, business activity, identity, custody, and enforcement remained situated in jurisdictions. Reaching a wider world meant dealing with those differences.

Outside investors were financing the businesses around Bitcoin. In May 2013, Union Square Ventures explained its investment in Coinbase through a company offering a wallet, merchant services, and exchange between bitcoins and conventional money. In December, Coinbase announced a further $25 million financing round led by Andreessen Horowitz. [53] [54]

The combination is revealing. The service brought together functions that early participants had arranged through individual trades, specialist websites, and public requests for help. Making those functions accessible had become a business proposition capable of attracting substantial external capital.

Then came a familiar retail name. By December 19–20, news of Overstock's plan to accept Bitcoin was circulating. Forum participants discussed what they would buy and why the proposed wait was so long. A company's intention was becoming a subject of anticipation among people who wanted more places to spend. [55] [56]

For a participant who had learned about the currency through a forum or searched enthusiast merchants for goods, that recognition could alter the sense of what was possible. The earlier purchases had been real. A large, recognizable retailer promised to make such activity easier to imagine as part of ordinary shopping.

By the closing months of 2013, the pioneer economy contained a more developed set of services, organizations, and ambitions. It also carried obligations to customers, vulnerabilities in custody, uncertainty about equipment, and conflicting rules at its boundaries.

The early participants had made Bitcoin usable in ways its transaction system alone could not provide. The people joining them would inherit both the arrangements and the unresolved responsibilities that came with them.

Overstock announced that Bitcoin checkout was live. Customers could select goods and choose Bitcoin alongside established payment methods. Coinbase would process the payment and handle conversion into U.S. dollars. [57]

The purchase no longer needed to begin by asking an enthusiast how to arrange it. A recognized retailer had placed the option inside its shopping cart.

That small change in the customer's experience rested on years of work: acquiring coins, finding a seller, arranging payment, and connecting the proceeds to a merchant's expenses. The checkout gathered those tasks behind one choice on a screen.

For people who had watched an economy assemble through forum posts and improvised services, it offered a tangible answer to the question that had accompanied Bitcoin from the beginning: what could someone use it for?