The first attempt to implement what is now known as crypto currency took place in 1997 when Dr. Adam Back created Hashcash. This article explores the question, “How did Bitcoin, the first cryptocurrency or digital currency, come into existence”?
Hashcash, the Origin of Cryptocurrency
In 1997, Dr. Adam Back developed a system of cryptography digital called Hashcash- an anti-spam mechanism that would add a time and computational power cost to sending an email. The aim was to make the sending of spam uneconomical by enforcing a protocol that forces a sender to prove that s/he had expended computational power to create a stamp in the header of an email before sending it. This concept, later known as Proof of Work (POW) is a core concept to Bitcoin, which the mysterious Satoshi Nakamoto refined.
B-Money: A Key Concept in Digital Currency
Another foundational concept that gave birth to Bitcoin is Wei Dai’s proposal for “B-Money” in 1998. B-Money can be described as a practical way to enforce contractual agreements between anonymous participants, highlighted two practical methods of maintaining the transaction data. First, every participant to the network would maintain a separate database of how much money belongs to users. Secondly, that all records are kept by a specific group of users, which means accounts of who has how much money are kept by a group of participants who are given the incentive to maintain honesty by putting their money on the line. If they failed the honesty test, then they would lose their money. This is the “proof of stake” (POS) idea where a specific set of users called master nodes can lose all the funds they have in the stake if they attempt to participate in any fraudulent transaction.
The Emergence of Reusable Proofs of Work
Another key stakeholder in the creation of the first cryptocurrency, specifically, Bitcoin, are the Cypherpunks. Originally an email mailing list of like-minded individuals, Cypherpunks shared the common belief with the emergence of the internet and subsequently, the internet of things or IoT, government and corporations would have an enormous amount of power over society. Most of the experiments, theories, and frameworks developed by the Cypherpunks took place in the 1980s through to the 1990s. The more pivotal strides taken in the creation of Cypherpunk money (or cryptocurrency), however, did not occur until the beginning of the 21st century.
As new ideas for developing a cryptocurrency emerged, Hal Finney created the Reusable Proofs of Work- an idea that was largely borrowed from Hashcash. Nick Szabo would later combine Hal Finney’s idea and other emerging projects to publish a proposal for a digital collectible known as bit gold in 2005. But Szabo failed to propose how the total units of bit gold would be limited, but instead foresaw a situation where units would be valued differently based upon the amount of computational work performed to create them.
And then Came Satoshi Nakamoto
In 2008, an unidentified person going by the name Satoshi Nakamoto (probably a pseudonym of a person or a group of people) published the Bitcoin whitepaper. Satoshi cited both Hashcash and B-money. He emailed the whitepaper dubbed, “Bitcoin: A Peer-to-Peer Electronic Cash System” to the Cypherpunk mailing list at metzdowd.com, giving birth to Bitcoin, the first successful peer-to-peer digital currency.
In the paper, Satoshi addressed many problems experienced by earlier developers, including the risk of double-spending as well as the risk that one token could be used multiple times to purchase various goods. But Satoshi focused most of the issues he addressed in the paper on privacy, which he considered paramount. Trying to explain why blockchain is important, Satoshi specifically highlighted how the traditional banking model only manages to achieve a level of privacy by limiting access to information to the parties involved and the trusted third party. He, therefore, proposed that although there is a need to announce all transactions publicly, privacy can still be maintained by breaking the flow of information by keeping public keys anonymous. In other words, while the network participants could see that someone is sending a specific amount to someone else on the network, the information shown to the public did not link to anyone.
Although the paper attracted a lot of criticism from skeptics, Satoshi did not stop, hence proceeded to mine the first block on January 3, 2009. Since then, Bitcoin has gone through a revolution, attracting many interests. The criticism is still on among many people, but the cryptocurrency has maintained a momentum never seen before, inspiring other cryptocurrencies to emerge.
Record: The data that has been stored on the blockchain since its inception
Proof of Work (POW): A protocol that requires a not-insignificant but feasible amount of effort to deter frivolous or malicious uses of computing power, such as sending spam emails or launching denial of service attacks.
Proof of stake (POS): A class of consensus mechanisms for blockchains that work by selecting validators in proportion to their stake in the associated cryptocurrency.