Introduction
The invention of cryptocurrency has fundamentally changed our perception of money and finance. Today, finance is more accessible thanks to the decentralized nature of the cryptocurrency ecosystem, which offers a highly diversified market with significant global volumes. Did it all begin with Satoshi Nakamoto’s invention of Bitcoin (BTC), or does the idea of Bitcoin have roots further back in time?
As far as we know, the developer of Bitcoin was influenced by other cryptographic and digital currency projects that came before Bitcoin. This article will explore the connections between those projects that ultimately led to the invention of Bitcoin.
Where Does the Term Cryptocurrency Come From?
Language can be seen as a living organism, evolving and changing to meet the needs of the times. Some linguists even say it reproduces itself whenever a child learns to speak.
The term cryptocurrency is a combination of “cryptography” and “currency.” Cryptography involves secure information and communication techniques using mathematical concepts and algorithms to encrypt messages. Cryptocurrencies are closely related to cryptography since blockchain technology relies on data encryption.
The concept was likely introduced by the cypherpunk movement of the early ’90s, which created an environment for the invention of cryptocurrencies as we know them today. This idea might have been shared through private correspondence, as a quick search on Google Trends shows that 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 individuals who believed that privacy is not only a fundamental human right but also an essential component of a free society.
The Cypherpunks took their name from cyberpunk, a science fiction genre set in a dystopian, lawless subculture dominated by advanced technology. The digital activism of the Cypherpunks involved supporting and promoting cryptographic tools to enhance people’s privacy, which was often compromised by intermediaries like financial institutions, banks, and corporations. The movement was influenced by David Chaum, the founder of the first cryptocurrency-like token, DigiCash, which we will discuss later.
The cypherpunk cryptography mailing list began in 1992 and quickly gained popularity. It hosted many discussions on mathematics, cryptography, computer science, philosophy, and public policy, including topics like anonymity, government monitoring, and corporate control of information. There is even a cypherpunk manifesto that emphasizes the importance of protecting and respecting one’s privacy.
Thanks to the group’s activism, a great deal of code was shared among cryptographers, coders, mathematicians, and others. This created a perfect environment for applications to thrive. While the word cryptocurrency does not directly come from the word cypherpunk, the idea behind the technology certainly has roots in the cypherpunk movement.
What Is Currency?
A textbook definition of 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 a barter economy, a person who grew wheat and wanted eggs would have to find a neighbor who raised chickens and was willing to trade. But what if the neighbor with eggs wanted berries instead? The barter system is inefficient because it requires a direct match of wants and needs.
To solve this, people developed a money system based on the exchange of physical currencies, enabling more complex economic activities. These physical currencies had to possess certain properties:
- Medium of exchange: Usable to purchase goods and services.
- Unit of account: Provides a standardized measure for economic activities.
- Store of value: Easily savable for future use.
What Is Fiat Currency?
Fiat currencies, such as the US dollar, are what we usually think of when we talk about currency. Throughout history, societies have used various items as currency, from seashells to cigarettes. The key to a currency’s value is collective trust in the value of a token.
Fiat currencies today are regulated by government organizations, such as central banks. Historically, widely used tokens were made of gold and silver due to their extensibility and scarcity. For instance, until the early 1900s, the US dollar was backed by the gold standard, requiring the Federal Reserve to hold gold equivalent to the fiat currency in circulation.
A currency is essentially an artificial concept based on mainstream acceptance of its value. It allows us to easily conduct transactions, make purchases, and save, providing a unified measurement system for various production and consumption processes.
Governmental regulation of the modern monetary system has political implications in tax collection, economic supervision, and money supply. These implications have become intrinsic to our understanding of money. Decentralized cryptocurrencies challenge this long-standing concept of fiat currency.
What Is Cryptocurrency?
We don’t know who coined the term cryptocurrency, but it was first used to describe decentralized virtual coins after Satoshi Nakamoto introduced Bitcoin (BTC).
Cryptocurrencies are decentralized virtual currencies issued independently of any government. They can be exchanged without banks managing accounts and verifying transactions. To eliminate these authorities, cryptocurrencies use cryptography to bypass 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. To understand cryptocurrencies, it’s important to first understand blockchain technology.
What Is Blockchain?
As the name suggests, a blockchain is a chain of blocks, each containing certain information. While the technology has been around for a long time, it became widely known after Bitcoin implemented it. Today, blockchain represents the backbone of most cryptocurrencies.
Blockchain works as a communal ledger that records all transactions ever made and is accessible to everyone. It consists of numerous nodes (network participants and their computing hardware) that systematically check each other. These nodes work to reach a consensus on the ledger’s current status after adding new information. This log of information makes up the cryptocurrency itself.
One problem with this kind of ledger is that a malicious node could add a fraudulent transaction in their favor. This is known as the double-spending problem, where malicious actors could generate an infinite amount of coins. Blockchains use different consensus algorithms to address this problem.
The first block in a Proof of Work (PoW)-based blockchain is called the Genesis block or block zero. It is hardcoded directly into the currency’s source code as the starting point. Subsequent blocks always refer to their previous block, except the Genesis block. Because each block contains information from the previous block, the blockchain ledger contains all transactions ever made.
What’s a Hash?
Blockchain nodes validate each new block through hashes. Hashes are standardized outputs of hashing algorithms that vary between coins. For example, Bitcoin (BTC) uses the SHA-256 hashing algorithm, while Ethereum (ETH) uses Keccak-256, and Litecoin (LTC) uses scrypt.
Hashing algorithms produce a fixed-length string from a large input, strictly based on the blockchain transactions. Even a tiny change in the input data results in a completely different hash, making alterations easy to spot. Another critical aspect of hash functions is their irreversibility, meaning it’s impossible to generate the original data from the hash.
What Are Consensus Mechanisms?
Consensus mechanisms are sets of rules followed by the nodes of a particular blockchain. They act as cryptographic algorithms, providing trust between participants without needing a third party. This allows cryptocurrencies to remain decentralized.
The most widely used consensus mechanisms are Proof of Work (PoW), applied by Bitcoin, Proof of Stake (PoS), and Delegated Proof of Stake (DPoS).
A History of Cryptocurrency
Bitcoin is unique because it is the first-ever truly decentralized digital coin. It earned the public’s trust without being backed by any other currency.
The underlying technology is complex and wasn’t created overnight. By examining history, we can see the technological advancements and social context that led to the invention and acceptance of Bitcoin and other cryptocurrencies.
Early Digital Currency Projects
Flooz
In 1999, Flooz.com started a membership point program with a digital currency called Flooz, each worth $1. Despite a large advertising budget, e-commerce’s unreliability and incidents of fraud led to the project’s downfall.
DigiCash
DigiCash is a significant milestone in Bitcoin’s history. David Chaum, its founder, is considered a pioneer in the cryptocurrency field. His articles introduced the concept of DigiCash, which closely resembles today’s decentralized cryptocurrencies. Although DigiCash failed to gain traction and collapsed, it laid the groundwork for future developments.
E-Gold
Launched in 1996, E-Gold was a service for irreversible online transactions with digital tokens backed by gold. It quickly became popular but also attracted criminal activity. Inadequate regulations led to its involvement in illegal operations, resulting in its gradual shutdown by the US government.
PayPal
Founded by Elon Musk in 1998, PayPal is a global payment system that allows online transactions. It has been successful and remains operational today. However, it does not qualify as a cryptocurrency because it is centralized and lacks intrinsic value.
Bit Gold
Inspired by a National Security Agency paper, Nick Szabo created Bit Gold, the first cryptocurrency-like system enabling secure transactions on a decentralized network without a third party. Although never implemented, Bit Gold influenced later developments.
HashCash
Created by Adam Back in 1997, HashCash is a protocol to filter email spam and DDoS attacks using PoW. Back’s work significantly influenced Bitcoin’s creation.
B-Money
Wei Dai’s 1998 paper, “B-Money, an Anonymous, Distributed Electronic Cash System,” outlined the basic properties of modern cryptocurrency networks. Although never implemented, B-Money was a significant milestone. Some speculate that Satoshi Nakamoto may have communicated with Wei Dai about B-Money’s architecture.
The Early Years of Bitcoin
Bitcoin emerged in 2008 during the global financial crisis, which diminished trust in financial institutions. On October 31, 2008, Satoshi Nakamoto distributed Bitcoin’s whitepaper, proposing a peer-to-peer electronic cash system based on cryptographic proof. It took Bitcoin a decade to prove its currency status. Initially, it had no price and no exchanges. The first Bitcoin exchange, bitcoinmarket.com, was launched in 2010 but did not last long.
Towards Bitcoin Adoption
The first Bitcoin purchase was made by Laszlo Hanyecz, who bought $25 worth of pizza for 10,000 BTC. This encouraged people to see Bitcoin as a currency. The first successful cryptocurrency exchange, MtGox, emerged in 2010, leading to a significant price increase. That year also saw the creation of the first two altcoins, Namecoin (NMC) and Litecoin (LTC).
Bitcoin and other altcoins continued to grow as financial instruments. Their perceived anonymity attracted those with ulterior motives, leading to the infamous Silk Road marketplace accepting BTC payments. The marketplace was shut down, and its founder was arrested in 2013.
These events helped Bitcoin gain widespread acceptance as a financial instrument. Despite early challenges, Bitcoin has proven its value to investors. Today, numerous exchange platforms like Coinbase and Kraken allow global cryptocurrency trading.
Final Thoughts
Bitcoin was introduced in 2008, but its invention was not an overnight process. Although the identity of Satoshi Nakamoto remains unknown, Bitcoin is the result of the collective efforts of cryptographers, mathematicians, and developers over the past 50 years. Therefore, we should view Bitcoin and its ecosystem as the products of a cryptocurrency community that promotes an open, transparent, and decentralized approach to handling money.
