The invention of cryptocurrency has radically changed how we perceive money and finance. Today, finance is more approachable thanks to the decentralised nature of the cryptocurrency ecosystem. This provides a highly diversified market with huge volumes globally. Did it all start when Satoshi Nakamoto invented Bitcoin (BTC) or did the idea for Bitcoin emerge further back in time?
As far as we know, this Bitcoin developer must have been influenced by other cryptographic and digital currency projects that came before Bitcoin. This article will reveal the connections between those projects that ultimately led to Bitcoin’s invention.
Where Does the Term Cryptocurrency Come From?
We can think of language as a living organism. It evolves and changes to fit the requirements of the spirit of the time. Some linguists even say it reproduces itself whenever a newborn child learns to speak.
The term cryptocurrency is coined from “cryptography” and “currency”. Cryptography is the application of secure information and communication techniques with the help of mathematical concepts and algorithms used to encrypt messages. Cryptocurrencies are closely related to cryptography as the whole blockchain technology depends on data encryption.
The concept was probably introduced by the cypherpunk movement of the early 90s and created the incubation environment for the invention of cryptocurrencies as we know them today. This might have been shared through private correspondence, as a quick search on Google Trends shows the term wasn’t used at all before the emergence of Bitcoin.
Who Were the Cypherpunks?
Cypherpunk is an ideological movement started in the early 90s by a group of people who shared the opinion that privacy is not only a fundamental human right but an essential component of a free society.
The Cypherpunks took their name from cyberpunk, a science fiction genre that is set in a dystopian lawless subculture dominated by advanced technology. The digital activism of the cypherpunks consisted of supporting and promoting the newly-founded interest in cryptographic tools that would help enhance people’s privacy, which was compromised by middlemen like financial institutions, banks, and corporations. The technical and ideological seeds of the movement were sown by David Chaum, the founder of the first cryptocurrency-like token, Digi Cash, which we will talk about later on.
The cypherpunk cryptography mailing list started in 1992 and rapidly gained popularity. It hosted many discussions on mathematics, cryptography, computer science, philosophy, and public policy. There was also an extensive range of discussions on anonymity, government monitoring, corporate control of information, and similar topics. There is even a cypherpunk manifesto that talks about the importance of protecting (and respecting) one’s privacy.
Thanks to the group’s activism, a great amount of code was shared among cryptographers, coders, mathematicians, and others. This was a perfect environment for the applications to thrive cumulatively. Even if the word cryptocurrency does not stem from the word cypherpunk, the idea behind the technology definitely takes its roots from the cypherpunk movement.
What Is Currency?
According to a textbook definition, a currency is a system of money used in a particular region. This system of money allows us to convert our efforts into tokens and these symbolic tokens date back to the barter economy.
In such an economy, a person who grew wheat and wanted to exchange it with some eggs would go up to their neighbor who raised chickens and ask them if they wanted some of their grain in exchange for eggs. But what happened when the neighbor with eggs wanted to have berries instead? Sure, you can go up to your gatherer neighbor to see if they are willing to give you some of their berries in return for your wheat, which you can go back and barter for some eggs.
However, as you can see, in a barter economy, it is sometimes tough to match what all the agents have and need. Therefore, people came up with a money system based on the exchange of physical currencies, which enabled them to engage in much more complex economic activities. These physical currencies had to possess the following properties:
- Medium of exchange: You can use it to purchase goods and services.
- A unit of account: It ensures a standardised measurement for the volume of economic activities.
- Store of value: You can easily save it for the future.
What Is Fiat Currency?
Fiat currencies such as US dollars are naturally the first thing that comes to mind when speaking about currency. But if you look at history, you will find out that societies used all sorts of things as a currency, from seashells to cigarettes. In this context, what makes up a currency is the collective trust over the represented value of a token.
The fiat currencies we use today are regulated by governmental organisations such as privately or publicly owned central banks. However, historically, the most widely used tokens were made of gold and silver. For reasons connected to extensibility and scarcity, accepting the value of a gold coin has been much easier for humans than other things.
On the other hand, a paper bill by itself doesn’t have intrinsic value. Today, central banks and the government are the entities that ensure trust over the fiat currency. However, until the early 1900s, USD was subject to the Bretton Woods system, a.k.a. gold standard, which obliged the FED to keep the equivalent amount of gold in its safe that corresponds to the value of fiat currency in circulation.
In brief, a currency is an artificial concept that is based on mainstream acceptance over the value it represents. It enables us to easily do transactions, purchases and make savings, providing a unified measurement system for many different production and consumption processes.
The fact that governmental organizations regulate the modern monetary system also has political implications in tax collection, supervision over economic activity, and the circulating money supply. Over time, these implications began to feel like they were intrinsic to the idea of money from the start. This is why decentralized cryptocurrencies are challenging for governments and groundbreaking for the rooted concept of fiat currency we have been using for centuries.
What Is Cryptocurrency?
We don’t know who coined the name cryptocurrency, but we do know it was first used to refer to decentralised virtual coins after Satoshi introduced the first implemented example of it, Bitcoin (BTC).
Cryptocurrencies are decentralised virtual currencies issued on their own terms, without a government. They can be exchanged without the need for banks to manage the accounts and verify the transactions. In order to omit these authorities, cryptocurrencies utilize cryptography to help circumvent the need for trust.
A cryptocurrency is essentially a collection of binary data (zeros and ones). What makes it special is the cryptographic information it carries through the blockchain. Exploring the blockchain first is a good idea to understand what a cryptocurrency is.
What Is Blockchain?
As the name suggests, blockchain is a chain of blocks where each block keeps a piece of certain information. The technology has been around for a long time, but it became widely known after Bitcoin implemented it. Today, it represents the backbone of most cryptocurrencies.
The blockchain works as a communal ledger that holds all of the transactions ever made and is accessible to everyone. It consists of a large number of nodes (network participants and their computing hardware) that check on each other systematically. The nodes work on reaching a consensus over the ledger’s current status after adding a new piece of information. And in fact, this log of information is what makes up the cryptocurrency itself.
The first problem with this kind of ledger is: a malicious node can add a transaction in their favour, that in fact didn’t occur. This is called the double-spending problem, and if not addressed, the malicious actors could end up generating an infinite amount of coins in the ledger. Blockchains apply different consensus algorithms to address this problem.
The first block in a PoW-based blockchain is called the Genesis block or block zero. It is embedded (hardcoded) directly into the currency’s source code because it is the starting point that will start some kind of referral loop. The subsequent blocks always refer to their previous block, except the genesis block. You can think of it as the first chain of the blockchain that, in time, others will be hooked. Because each block contains the information from the previous block, the blockchain ledger contains all of the transactions ever made.
What’s a Hash?
Blockchain nodes agree on the validity of each new block through hashes. Hashes are standardised outputs of hashing algorithms that differ from coin to coin. For example, Bitcoin (BTC) uses the SHA-256 hashing algorithm, while Ethereum (ETH) uses Keccak-256 and Litecoin (LTC) uses scrypt.
Hashing algorithms essentially aim to produce a fixed-length string from a large arbitrary input that strictly depends on the transactions made on the blockchain. Even a tiny change in the input data results in an unrecognizable hash. This way attempts to alter the previous block can be spotted very easily. Another critical aspect of hash functions is their irreversibility. That means it’s impossible to generate the original data from the hash.
What Are Consensus Mechanisms?
Consensus mechanisms are basic sets of rules followed by the nodes of a particular blockchain. They represent cryptographic algorithms that play the role of a notary or an authority that provides trust between the participants. It eliminates the need for a third party to oversee the transactions and allows cryptocurrencies to remain decentralised.
The most widely used and popular consensus mechanism is the Proof of Work (PoW), applied by Bitcoin, as well as the Proof of Stake (PoS) and the Delegated Proof of Stake (DPoS) algorithm.
A History of Cryptocurrency
What makes the Bitcoin network unique is that it is the first-ever digital coin that is truly decentralised. Without being backed by any other currency, it has earned the trust of the general public, who now believe in its intrinsic value.
We know that the underlying technology is very intricate and was not created overnight. In fact, if we look at history with a pair of educated eyes, we see the technological advancements and social context that gradually led up to the invention and widespread acceptance of Bitcoin and other cryptocurrencies.
In 1999, Flooz.com started a sort of membership point program with a digital currency called, you guessed it, Flooz. Each Flooz was worth $1, and it could be used on the collaborator online shops.
Even though Flooz’s advertisement budget was over the top, e-commerce still hadn’t proven its reliability at the time. Moreover, there were incidents of purchases with stolen credit cards and money laundering by the Russian mafia, which undermined the project’s reputation significantly. It was shut down soon after.
Digicash is a very important milestone in the history of Bitcoin. David Chaum, the founder of Digicash, is widely regarded as an untimely pioneer in the cryptocurrency field. There is no evidence that Chaum was actually involved in the cypherpunk mailing lists; however, his tad bit anarchist ideology on the importance of privacy and valuable research on cryptography and computer science was crucial for the movement.
In 1983, David Chaum was still a graduate student at Berkeley. He introduced the concept of Digicash through his legendary articles “Traceable E-mail, Reverse Addresses and Digital Aliases” and “Transaction Systems to Make Big Brother Obsolete”, together with an anonymous digital payment system that was very much similar to the decentralized cryptocurrencies we know today. Also, his idea of blind signatures evolved into the private keys and public keys that have been utilised in blockchain technology.
A few years later, he started a company called Digi Cash in order to materialise his virtual currency system, but at the time, it failed to gain traction and collapsed soon after.
At the beginning of the ‘90s, the dot com boom set the spirit of the time. Many startup fintech companies emerged, and online transactions systems were the new hot topic.
E-Gold emerged in 1996 as a service for irreversible online transactions with unique digital tokens that were backed by gold. It enjoyed being the first successful online payment system and became widely popular soon after it was launched, reaching 5 million users over the internet.
The popularity of E-Gold also attracted the attention of criminals. Because online payment systems were relatively new, regulations and safety measures were still inadequate compared to present-day ones. E-Gold rapidly turned into a black market currency and became involved in black market operations and scams. Consequently, it was gradually shut down by the US government.
Paypal was launched during the dot com boom in the late 90s. The rising fintech industry must have caught Silicon Valley entrepreneurs’ attention, so the most famous one among them, also known as the founder of Tesla, Elon Musk, founded PayPal in 1998. It was and still is a global payment system that allowed online transactions. It was pretty successful and is up and running still.
One thing might have caught your eye about these digital assets we talked about so far. None of them can assert being a cryptocurrency because they lack the two fundamental aspects: operating on a decentralised network and possessing intrinsic value rather than being backed by another currency. They only digitally represented the value of fiat money or gold. Even so, they play a part in changing our concept of money from tangible tokens to virtual coins.
Around the same time that E-Gold and PayPal were launched, a group of researchers from the National Security Agency published a paper outlining the first cryptocurrency-like token. Inspired by this paper, Nick Szabo, a computer scientist specialising in cryptography, took the concept one step further and created Bit Gold. Even though it was never implemented on a real scale, it was the first cryptocurrency-like system where secure financial transactions on a decentralised network are possible without a third party responsible for confirmation.
Created by Adam Beck in 1997, HashCash is not a payment method but a protocol to filter e-mail spamming and denial of service (DDoS) attacks. It is a system that works on PoW procedure. He is the first to implement hash functions and the PoW procedure. Beck’s work was so important in putting the pieces together to create Bitcoin, Nakamoto refers to him as a source of inspiration.
In 1998, Wei Dai, a cryptographer and a member of cypherpunk, published a revolutionary paper called “B-Money, an Anonymous, Distributed Electronic Cash System”. This paper outlined the basic properties of all cryptocurrency networks we have today. Like Bit Gold, B-Money was never implemented, but the project was a significant milestone in Bitcoin’s invention.
There have even been rumours of Satoshi Nakamoto reaching out to Wei Dai to talk about the architecture of B-Money, but Wei Dai never responded. Some people even think that Wei Dai could be the mysterious Satoshi Nakamoto, given his extended knowledge of decentralised payment systems. Regardless of his relation to Nakamoto, as a tribute to his contribution to the technology behind cryptocurrencies, today, the smallest unit of Ethereum (ETH) is called a Wei.
The Early Years of Bitcoin
It took 25 years from Chaum’s DigiCash and 10 years from Chaum’s B-Money for Bitcoin to emerge. In 2008, many businesses were sinking due to the global financial crisis. It was the most significant financial crisis since the great depression, which aggrieved many people worldwide and diminished the trust over financial institutions.
On October 31st, 2008, Satoshi Nakamoto distributed Bitcoin’s whitepaper across cryptography mailing lists claiming that what we need is a peer-to-peer electronic cash system based on cryptographic proof instead of trust. It took Bitcoin a decade to prove its currency status. At first, it didn’t even have a price, nor were there any Bitcoin exchanges yet. The first Bitcoin exchange was bitcoinmarket.com, which was launched in 2010, yet didn’t stick around for too long.
Towards Bitcoin Adoption
The first purchase made with Bitcoin was when a Floridian programmer named Laszlo Hanyecz purchased $25 worth of pizza in exchange for 10,000 BTC. It sounds like a tragedy for Hanyecz; however, this move encouraged more people to perceive Bitcoin (BTC) as a currency.
The first successful cryptocurrency exchange, MtGox, emerged in 2010. That year, the Bitcoin price increased tenfold. That same year, the first two altcoins, Namecoin (NMC) and Litecoin (LTC), were forked from Bitcoin’s blockchain and started their initial coin offerings (ICO).
In the following years, Bitcoin and other altcoins continued to grow as financial instruments. Moreover, cryptocurrencies’ perceived anonymity was interesting for those with ulterior motives. For this reason, it didn’t take long before the infamous illegal marketplace Silk Road started accepting BTC payments, taking advantage of anonymity and low transaction fees worldwide. The marketplace was shut down and its founder Ross Ulbricht was arrested by the FBI in October 2013.
All these events and people helped Bitcoin’s widespread adoption as a financial instrument. Even though it had rough patches at the beginning, Bitcoin has proven its place in the eyes of the investors. Today, numerous exchange platforms such as Coinbase and Kraken let you buy, sell and trade cryptocurrencies globally.
A Few Words Before You Go…
Bitcoin was introduced in 2008 for the first time. However, the digital asset wasn’t invented overnight. Even though we don’t know who hides behind the pseudonym of Satoshi Nakamoto, we know that Bitcoin is the collective work of many cryptographers’, mathematicians’, and developers’ efforts in the last 50 years. For this reason, we should look at Bitcoin and its ecosystem as products of a cryptocurrency community that cultivates an open, transparent, decentralised approach towards the way we handle money.