Blockchain 101

The Birth of Digital Money

The creation of Bitcoin combined several technologies in order to solve problems that other digital currencies were not able to address.

Ever hear of Error 402? It’s an HTTP error message for not enough funds or when payment is required, and it has been there since the inception of the World Wide Web. This is proof that the internet was built with a native currency in mind. This was first addressed by David Chaum, a “cypherpunk” dedicated to creating anonymous electronic money.

 

A HISTORY OF BITCOIN


David Chaum and DigiCash (1989)

David Chaum created a form of centralized “electronic money” that utilized the same kinds of cryptographic protocols (like public/private key cryptography) that support modern cryptocurrency networks.

DigiCash was a form of early electronic payment which required software to withdraw notes from a bank and designate specific encrypted keys before it can be sent to a recipient. This advancement of public and private key cryptography allowed electronic payments to become untraceable by the issuing bank, government, or third parties from accessing personal information through online transactions. Later acquired by Mercantile Bank, the Mark Twain Bank located in Missouri was the only U.S. Bank supporting DigiCash systems. Deutsche Bank based in Germany was the second backing bank of DigiCash Systems. DigiCash filed for Bankruptcy in 1998.

Why Digital Cash?

“The advent of high-quality color copiers threatens the security of paper money. The demands of guarding it make paper money expensive. The hassles of handling it (such as vending machines) make paper money undesirable. The use of credit cards and ATM cards is becoming increasingly popular, but those systems lack adequate privacy.”

-Jorg Kienzle and Adrian Perring in “Digital Money: A divine gift or Satan’s malicious tool?”

 

Hashcash (1996)

Created by Adam Back, Hashcash was initially designed to limit email spam by forcing email senders to solve computational puzzles. It never saw widespread use as a spam protection mechanism and despite the name “Hashcash,” it was never a financial instrument. Bitcoin repurposed these Proof-of-Work (PoW) puzzles to become the basis of Bitcoin mining, or consensus.

E-Gold (1996)

E-Gold was digital currency backed with gold was introduced in 1996. It was reputed to be used for money laundering and inevitably shut down by the U.S. government.

B-money Proposal (1997)

In 1997, Wei Dai explored how to create anonymous, distributed systems in which money was created by the Hashcash PoW algorithm. The B-money proposals main goal was to incorporate a financial unit into the Hashcash PoW algorithm, connecting digital money with PoW for the first time.

Bit Gold Proposal (1998)

Nick Szabo outlined an algorithm for posting transactions using Proof-of-Work to servers, which then must agree on these transactions. This same ‘consensus model’ is now built into the Bitcoin blockchain.

PayPal (1999)

“PayPal Holdings, Inc. is an American company operating a worldwide online payments system that supports online money transfers and serves as an electronic alternative to traditional paper methods like checks and money orders.” –Wikipedia

Reusable Proofs of Work (2004)

Hal Finney attempted to make proofs of work into exchangeable tokens. Hal Finney later became the first person to receive a Bitcoin transaction from Bitcoin creator Satoshi Nakamoto.

Liberty Reserve (2006)

Liberty Reserve was a digital currency that allowed users to chose the backing of their tokens in either Euros, USD or ounces of gold. Liberty Reserve’s services were centralized, and they had a reputation for being used for money laundering. The project was inevitably shut down by the U.S. government over Know Your Customer/Anti-Money Laundering laws, as users never had to provide identification to use Liberty Reserve’s services.

Bitcoin Whitepaper Published (2008)

In response to the global financial crisis in 2008, Satoshi Nakamoto published the Bitcoin whitepaper. The document would act as the foundation for the soon to be launched Bitcoin network.

Bitcoin Genesis Block Mined (2009)

January 3, 2009: The first Bitcoin block was mined, marking the official launch of the Bitcoin network. The next lesson will explore the mysterious creator(s) of Bitcoin, Satoshi Nakamoto.


 

“Bitcoin was the beginning for cryptocurrency, however, it was 25 years in the making!”