When Satoshi Nakamoto posted their “white paper” setting out the ideas for a peer-to-peer digital cash system called Bitcoin in 2009, they set in motion not just a scramble to define the future of money that has intensified with each year, but they posed fundamental questions about the nature of identity on the internet. 

The meta-narrative behind Satoshi’s founding of Bitcoin is the fact that nobody knows who was behind the moniker. A pseudonymous individual or group, basically no more than an avatar on a forum and mailing list, was able to convince others on the internet that their idea for a new monetary system had merit, and was worth spending time on. 

This founding myth of Bitcoin—that technical meritocracy should hold sway over real-life identities—has carried over into general thinking in the cryptocurrency space. Pseudonymity is a given, and sometimes an asset. Real-life, “meatspace” identities, in the meantime, can be liabilities. 

But the question of tying digital and offline identities is also one that has vexed the cryptocurrency—and wider digital—world. While purely digital identities allow users to sidestep real-world repercussions, including authoritarian regimes, or unwelcome personal intrusions; they also expose those same online systems to the potential for fraud. 

The wider cryptography world even has a name for this: Sybil attacks. This is when an attacker generates a vast amount of pseudonymous accounts to subvert a reputation system. For example, a flood of damaging reviews for a merchant on Amazon, generated by one party. 

Bitcoin’s solution to Sybil attacks is partly what makes it such an elegant solution for digital cash. Any actor’s ability to add new transactions to the Bitcoin blockchain is proportional to the computing power it contributes to the network. This is Bitcoin mining. Therefore, the more people mine Bitcoin, the more computing power is needed, and the more expensive it is to carry out a Sybil attack on the cryptocurrency. This is Bitcoin’s famous “proof of work,” and also why the protocol is so energy intensive. 

The tension around identity in crypto is fundamentally a question of trust: Who is a trusted source of information? Can each node in the network trust the other? Crypto orthodoxy says that pseudonymous actors should, on balance, be given the benefit of the doubt. Audit their actions—be it the code they publish, the white papers they write, or the forum posts they put up—instead of the individual. 

But crypto also has reason to be wary of pseudonymous actors. This was played out perhaps most dramatically last year in the midst of “DeFi Summer.” At the time, decentralized finance, or DeFi, was just taking off. People were discovering the joys of using one token as collateral to reap rewards from another protocol, which in turn issued a new set of tokens that could once again be collateralized for even greater riches. 

The chief engine of this activity was a decentralized exchange called UniSwap. It’s decentralized because it’s really a bundle of smart contracts on the Ethereum blockchain, with a website that lets users easily access the features written into them. Traders lock up tokens to create a pool of liquidity, and other traders swap tokens with those pools. The smart contracts take care of the mathematics in between.

Uniswap’s simplicity meant that traders could easily swap tokens without needing to lodge their passport information or other papers with an exchange like Coinbase. It also meant that token issuers could create a way for the market to easily trade their tokens without relying on an exchange to deign to list them. The conditions were ripe for an explosion of token-trading activity. 

As Uniswap trading volumes soared from around $50 million a week in the spring to about $6 billion by the end of summer last year (it was doing about $25 billion in volume this May), the opportunity to other venues to capture some of the frenetic activity was clear. 

Enter NomiChef, a pseudonymous Twitter account who took the guise of a cartoon panda. They forked the Uniswap code, which is open-source and can be inspected or copied by anyone, to create a rival called SushiSwap. They then designed an incentives scheme using a new token, SUSHI, to lure traders over to the new venue. 

Ingeniously, the SUSHI token was first listed on Uniswap to make it easy for existing traders to pool their funds to provide liquidity. Those who did so early would be rewarded with more SUSHI tokens. When the SushiSwap platform launched, traders could withdraw their funds from Uniswap and deposit them in the new smart contracts. Over a billion dollars worth of liquidity was drained from Uniswap this way in a matter of days. This liquidity draining mechanism is now known as a “vampire attack.”

Before the SushiSwap launch, though, its pseudonymous creator NomiChef had access to millions of dollars in funds that were granted to him as part of the initial token issuance of the new venue. He could have sold the tokens for a profit, potentially tanking the embryonic project. It would have been the equivalent of a startup founder cashing in all his equity. Over one frantic weekend for the nascent DeFi community, the pseudonymous panda did just that. 

The price of the SUSHI token promptly crashed, leading to questions over the motives and whereabouts of the cartoon avatar founder. Was this all just an elaborate scheme for NomiChef to create and then abscond with tens of millions worth of Ether? There was no way for anyone to know, since SushiSwap’s creator wasn’t tied to any real-world identity, and appeared to be less altruistic than Bitcoin’s Satoshi. 

Ultimately NomiChef returned to the scene and put the funds back. Interestingly, he transferred ownership of the project, not to his lieutenant, the similarly pseudonymous 0xMaki, but to FTX founder Sam Bankman-Fried, who was emerging as a key figure in the booming DeFi ecosystem. Pseudonymity’s benefits had its limits, it seemed. 

Many of crypto’s key actors today remain pseudonymous, existing only as usernames or avatars on the internet. Today, people like banteg and tracheopteryx are critical players in the defi landscape. The likes of DegenSpartan or the collective known as e-girl capital are noted investors. 

As for crypto’s original pseudonymous puzzle, Satoshi vanished a couple of years into the Bitcoin project. Several attempts to deduce his identity have been made, as have efforts to claim the identity of Satoshi. But the pseudonym’s power remains, both in theory and in practice. If and when they return, they will have access to “Satoshi’s hoard”, a pile of Bitcoin worth some $30 billion, that if they chose to sell, would almost certainly cause the price of Bitcoin to fall. But the Satoshi myth endures among Bitcoin believers, who continue to place their faith in the pseudonymous inventor of the world’s first cryptocurrency.

Ad placeholder