The Sunday Long Read: A brief history of digital currencies and Bitcoin

17 hours ago by Jenny Ross • 4 min read

“History doesn’t repeat itself, but it often rhymes.” — Mark Twain

Article by Pedro Febrero

In 1921, Henry Ford, known as the father of automobile mass production after the introduction of new techniques such as mechanised assembly lines, admitted during an interview that a currency generated by energy would be more beneficial than centralised money production by central banks and/or governments, as he claimed this contributed greatly to the possibility of continuing conflicts and wars.

Along with Thomas Edison, one of the pioneers of mass-market electricity for cities, both believed that the fairest format for money-making would be through electricity, a key asset for everyday life.

However, this proposal was not accepted, and the first attempt to distribute the power of creating money to more agents died. But humans are never satisfied with what they have and, after the invention of the modern computer, we’re at it once again. Hopefully, this time for good.

The foundations of Bitcoin

A few years later, two key inventions arrived that laid the foundations for the development of the Bitcoin protocol by an anonymous entity named Satoshi Nakamoto in 2008.

The first was the invention of a format for encrypting information in a decentralized manner. The concept of Pretty Good Privacy (PGP) was devised by the former special director of Computer Professionals for Social Responsibility (CPRS) Philip Zimmerman. He devised it as a method for promoting the relevance of privacy in a digitised world.

PGP used a mechanism called hashing to encrypt data so that it could be kept safely in the possession of its owner. PGP binds two or more users through their public keys, never sharing the private key from which each public key is derived.

The second critical invention before Bitcoin was the creation of Hashcash, an algorithm that defends public networks from spam attacks. Put another way, this technology forces participants to expend energy in order to send data packets to other users.

This energy expense is exponential depending on the number of requests made to the network. The more data packets sent by users, the more energy is spent by the machine to participate in the network.

This brand-new program ensured that a network attack always had an associated energy cost, forcing attackers to spend more and more energy as more communications were made with other participants.

The most widely adopted version of the Hashcash anti-spam engine became known as Proof-of-Work, which turns out to be an essential part of Bitcoin’s operation (as we’ve discussed here).

The first digital “monies”

With the development of these two techniques and the improvement of public networks in terms of scalability and data transmission capacity over the internet, the first attempts to create a currency were made.

In 1983, David Chaum — a cryptographer, mathematician, and genius programmer — developed the concept of Ecash, a purely digital e-money associated with banks and services. This later became Digicash in 1989 — the official product of the Ecash “protocol”. The project went bankrupt in 2002 due to lack of use and funding, as it was not supported by the banking institutions of the time (as expected by the founder).

In 1996, E-gold, a company that kept gold from its depositors and let them use a digital version of that gold for online payments, was created. After more than 10 years of growth, the company closed its doors in 2009 as it was found guilty of facilitating money laundering crimes.

Perhaps the closest development to the Bitcoin protocol was conceptualised by cryptographer, mathematician, programmer, and philosopher Nick Szabo, who created the concept of Bit Gold.

Szabo’s Bit Gold

In the framework proposed by Szabo, participants would devote computational power (energy) to solving cryptographic puzzles and writing information in a shared database.

The idea of ​​the Bit Gold network was for participants to use distributed PGP hash systems so that everyone could reach consensus on the state of transactions on the network (as with Bitcoin).

The biggest problem for Szabo was how to protect the system itself against Byzantine agents without resorting to data centralisation. In other words, any participant trying to attack the network, such as using the same funds for two double-spend transactions, should be penalised while the entire network ceases to function.

For Szabo, the failure of all systems that preceded the Bit Gold proposal was that they all depended on a central point — either a company or a person — which could be coerced by several others, and they would therefore struggle to implement dynamic anti-counterfeit cost systems.

The power of Bitcoin

Further attempts to create payment mechanisms were eventually restricted to the use of fiduciary currencies. Those still surviving today, such as PayPal or Stripe, simply communicate with banks to settle transactions and are managed as online platforms that own the rights of their users’ data.

However, many still believe in Ford and Edison’s original idea of a decentralized currency powered by energy that does not completely rely on banks or governments and gives some semblance of self-sovereignty back to the people.

It would seem that the problem with all previous attempts to create money over the internet (or MoIP) is simply that they were based on a centralised format of value transmission. The fact that Bitcoin and the majority of cryptocurrencies are decentralized is what gives the asset class its appeal, and this real-world use case has finally helped the idea to grow over the last decade.

Will the trend continue? As long as there’s a flow of buyers greater than sellers, we believe there’s little room for bitcoin to not continue gaining market share vs other monies, such as the dollar, silver, or even gold.

Article originally published at: https://medium.com/cryptonerds/a-brief-history-of-digital-currencies-and-bitcoin-d4910e23c2eb by Pedro Febrero (@febrocas)