Digital Currency Before Bitcoin
The creation of Bitcoin in 2009 marked the birth of the first digital currency to achieve widespread adoption across the globe. However, the concept of a secure digital currency has been around since the 1980s and there have been many previous attempts that directly inspired Satoshi Nakamoto’s creation of Bitcoin.
In 1982, computer scientist David Chaum released the paper Blind Signatures for Untraceable Payments in which he outlined an alternative to the electronic transactions hitting retail stores at the time. His paper is considered one of the first proposals of digital currency in history.
He continued working on his proposal and eventually launched a company called DigiCash in 1990 to commercialize the ideas in his research. In 1994 the company put forth their first electronic cash transaction over the internet.
DigiCash transactions were unique for the time considering their use of protocols like blind signatures and public key cryptography to enable anonymity. As a result, third parties were prevented from accessing personal information through the online transactions.
Despite the novel technology, DigiCash was not profitable as a company and filed a chapter 11 bankruptcy in 1998 before being sold for assets in 2002.
Chaum thought that DigiCash entered the market before e-commerce was fully integrated with the internet and that lead to a chicken-and-egg problem. In a 1999 interview he stated, “It was hard to get enough merchants to accept it, so that you could get enough consumers to use it, or vice versa”.
Bit Gold was an attempt to create a decentralized digital currency proposed by Nick Szabo – a computer scientist and cryptographer who is widely regarded as the inventor of smart contracts. Bit Gold was never actually implemented but is considered a direct precursor to Bitcoin considering the technical similarities.
Szabo did not like the fact that traditional financial systems required a large amount of trust to conduct transactions, leading to issues like fraud and theft. Bit Gold was conceived to provide a more trustless model of transacting, based on the economic properties of gold with increased security.
Bit Gold and Bitcoin are similar because Bit Gold planned to implement a proof-of-work style consensus mechanism where computing power is used to solve cryptographic puzzles. The solved puzzles would then be sent to a Byzantine fault tolerant peer-to-peer network with each puzzle attached to the public key of the solver.
A cryptographic hash would then be used to link the solution of the most recent puzzle to the next puzzle. This method was designed to secure groups of transactions because network users would have to agree on previous puzzle solutions before being able to solve new ones.
The biggest difference between the proposal for Bit Gold and Bitcoin is the fact that Bitcoin successfully solved the double spending problem. An example of double spending is paying $10 of BTC for lunch, then using the same $10 of BTC for another transaction later in the day. This problem was a major hurdle for early projects because digital currency is simply represented as data that can be copied.
Most forms of digital currency use a central authority that tracks account balances to combat the double spending issue, but Szabo wanted to mimic the security and trust characteristics of gold, which doesn’t depend on a central authority.
The Big Gold proposal planned to use a Byzantine fault tolerant method relying on a quorum of network addresses, but that made the network vulnerable to Sybil attacks (an attack where one party controls many nodes and manipulates the network).
Bitcoin utilizes blockchain technology and the concept of block confirmations to enable protection against double spending, allowing for more transaction security than what Bit Gold proposed.
Hashcash was initially proposed in 1997 by British cryptographer Adam Back as a “mechanism to throttle systematic abuse of un-metered internet resources such as email”. He further detailed the idea in a paper titled Hashcash – A Denial of Service Counter-Measure released in 2002.
Essentially, the problem Hashcash aimed to solve was the widespread distribution of spam email. Back’s solution was to require the sender of an email to use a small amount of CPU power to solve a puzzle before sending the email out.
For a regular email user, this small amount of CPU power is negligible and in the worst case might delay the sending of an email by a few seconds.
However, for a spammer trying to send out thousands of emails per minute, the combined CPU power required for each email is significant enough to make this act impossible. The spammer would also have to pay the sum of the electricity costs associated with the required computations if they continued sending out spam.
Satoshi Nakamoto referenced Hashcash in the Bitcoin Whitepaper, saying “to implement a distributed timestamp server on a peer-to-peer basis, we will need to use a proof-of-work system similar to Adam Back’s Hashcash”.
B-money was a proposal for an “anonymous, distributed electronic cash system” created by computer engineer Wei Dai in 1998. Dai wrote an essay in 1998 outlining his idea and sent it out to the cypherpunks mailing-list.
In his essay, Dai proposed two protocols, the first of which he knew was impractical because it required “heavy use of a synchronous and un-jammable anonymous broadcast channel” but would serve as motivation for the second protocol.
In the first protocol a proof of work function is suggested as a way to create money, proposed as a possible application of Hashcash’s proof of work technology discussed in the above section.
Also, transactions would be broadcasted to all network participants and everyone would keep track of how much money belongs to each account. Dai then outlined the possibility of contracts that could be made with reparation in case of default, and a third party as an agreed arbitrator.
The second protocol was different from the first because only a subset of network participants (servers) are used to keep track of how much money is owned by each account.
Considering the servers must be trusted, Dai wrote that a mechanism to keep them honest is required. His idea was to have each server deposit a certain amount of money in a special account to be used for potential fines or rewards for proof of misconduct.
The format of transactions broadcasted on the network was the same as described in the first protocol, with the added expectation that transaction participants would verify the message has been received and processed by a randomly selected subset of the servers.
Satoshi Nakamoto stated in a 2010 forum post that Bitcoin “Is an implementation of Wei Dai’s B-money proposal on Cypherpunks in 1998 and Nick Szabo’s Bitgold proposal”. Wei Dai and Adam Back were the first two people contacted by Satoshi Nakamoto as he was developing Bitcoin in 2008.
Cypherpunks and the Philosophy of Stateless Currency
Cypherpunks are a collection of activists that advocate for the use of privacy-enhancing technologies such as cryptography for social and political change. In 1992 Eric Hughes, Timothy C. May, and John Gilmore founded a small group of cryptographers that would meet in person in San Francisco and adopted the name “Cypherpunks”.
The Cypherpunks mailing list was created in the same year as an active forum for technical discussion on topics like cryptography, math, computer science, politics, and philosophy.
Cypherpunks generally hold Libertarian political views and many believe in the idea of crypto-anarchism outlined in Timothy C. May’s The Crypto Anarchist Manifesto (1992).
May mentions that new technologies “will alter completely the nature of government regulation, the ability to tax and control economic interactions, the ability to keep information secret, and will even alter the nature of trust and reputation.”
He also states that the technology for this social and economic revolution has existed in theory since the 1980’s, but “the next ten years will bring enough additional speed to make the ideas economically feasible and essentially unstoppable.”
In 1993, Eric Hughes released A Cypherpunk’s Manifesto which outlined the core principles of the Cypherpunk movement. Some of the most significant statements are included below:
- “Privacy is necessary for an open society in the electronic age.”
- “Privacy in an open society requires anonymous transaction systems. Until now, cash has been the primary such system.”
- “Privacy in an open society also requires cryptography. If I say something, I want it heard only by those for whom I intend it.”
- “We cannot expect governments, corporations, or other large, faceless organizations to grant us privacy out of their beneficence.”
- “We the Cypherpunks are dedicated to building anonymous systems. We are defending our privacy with cryptography, with anonymous mail forwarding systems, with digital signatures, and with electronic money.”
To summarize, the Cypherpunks mission is to build open source systems designed to defend privacy for everyone in this technological era. They believe that individuals should have the power to reveal their identity and words only when desired, and that neither governments nor corporations can sufficiently protect this right.
The Cypherpunk movement is directly responsible for the creation of digital currency, blockchain technology, and Bitcoin. All four founders of the Bitcoin precursors mentioned above (Adam Back, Nick Szabo, Wei Dai, and David Chaum) were Cypherpunks that first proposed their ideas through the mailing list.
Satoshi Nakamoto cited a number of Cypherpunks in the Bitcoin whitepaper, and first announced the whitepaper and genesis block creation through the mailing list. Additionally, many of the early Cypherpunks became core developers for Bitcoin including Hal Finney and Adam Back.
* The information contained in this article is for education purpose only and not financial advice. Do your own research before making any investment decisions.
This article is contributed by Victor Lai with the help of our Senior Analyst Kieran O'Day.