The History Of Digital Currencies Part 1 — From DigiCash To Bitcoin
When most people think of digital currencies, Bitcoin is the first currency that comes to mind. Today, Bitcoin’s all-time high of more than $61,000 (reached on March 14th 2021), decentralized finance (DeFi), blockchain technology, and the NFT craze have caused Bitcoin and other cryptocurrencies to enter the forefront of world consciousness and the financial industry.
However, whether you have heard of them or not, multiple different digital currencies existed before Bitcoin and the thousands of other cryptocurrencies today referred to as altcoins. In fact, digital currencies have existed for at least a few decades.
DigiCash: An Early Leader In The Development Of Digital Currencies
In 1983, cryptographer David Chaum published a paper titled “Blind Signature for Untraceable Payments” in which he applied the concept of blind signatures to money. Chaum’s system involved applying a blinding formula to encrypt information passed between people. By using the blinding formula, “Blinded cash” could be safely transferred between individuals with a signature of authenticity and the ability to be modified without being traced.
In 1989 Chaum applied the concepts outlined in his paper in reality by founding a company and creating the digital currency DigiCash. DigiCash predated the blockchain. Instead of using voting to verify transactions, a user would buy digital money from a bank, which was then confirmed by the bank.
Every unit of money was then placed in a metaphorical envelope and made anonymous. The user was then free to complete transactions using the digital money. The bank can tell from the signature that the digital money is real, but not who owns that money, making this digital money system, DigiCash, anonymous.
DigiCash didn’t really take off. It offered a solution to a problem that people didn’t see. Most people just preferred to use their credit card to shop online. At one point, Bill Gates wanted to integrate DigiCash with WIndows 95, but Chaum felt that the rumored $100 million offer to purchase the rights to integrate DigiCash was not enough, and eventually Microsoft withdrew the offer.
Netscape, a popular internet browser at the time, also revoked their offer with DigiCash. Investors continued to invest in DigiCash, but even though eCommerce was growing quickly, online shoppers were not interested in using DigiCash. People had a hard time grasping and believing that credit cards were not secure and that DigiCash was more secure, and eventually with all offers revoked, DigiCash went bankrupt in 1999.
Was DigiCash too early for its time or was it the mismanagement of offers from Bill Gates / Microsoft and Netscape that sealed its fate? Might DigiCash still be in existence today if Chaum had taken the offers? We will never know, but DigiCash did provide technological developments that enabled other digital currencies to appear later.
eGold was probably the most successful next attempt at creating digital currencies. It was a simple enough concept. Gold coins were placed in a safe deposit box. Then a website was created to sell digital portions of the gold coins. The digital portions or “shares” became a new currency, called eGold.
Although eGold was able to achieve a new milestone of 1 million people using the currency, unfortunately, eGolds security was not strong enough to prevent hackers and customers began to lose their deposits.
After the Patriot Act passed in 2001, gold reserves were frozen and that combined with increased scams caused users to leave the platform. Eventually the founders were actually arrested because they were operating without a license, finally signaling the end of eGold as a widely used digital currency. Regulation played a key role here.
B-Money was a digital currency concept proposed by a developer named Wei Dai in 1998 as a decentralized electronic cash system. Dai had obviously learned from the centralized mistakes of eGold, however, after writing the whitepaper for B-Money Dai was unable to get it to become popular enough to actually develop the B-Money platform.
BitGold was another decentralized digital currency proposed by Nick Szabo around the same time as B-Money. He wanted BitGold to have similar properties as real gold, however, it too was ultimately unsuccessful. Thankfully, these decentralized concepts motivated future developers, including Satoshi Nakamoto, the founder/s of Bitcoin.
Originally developed in the mid-90’s, Hashcash was one of the most successful digital currencies before Bitcoin. It was designed for multiple reasons, including the prevention of email spam. An original email sent in 1997 by Dr. Adam Back used a partial hash in the email, and he would later go on to start HashCash, which used the cryptographic trick known as hashing, which takes data and turns it into a number of a length that is predetermined.
Adam Back later wrote a whitepaper to further detail the process and how it could be used, including for digital currencies, comparing it to DigiCash. Although it, along with Dwork and Naor’s proposal, established the Proof of Work system, Hashcash did not last. What it did provide was a tool for further development that could be applied to digital currency.
Later, Proof of Work would become an important aspect of Bitcoin, and Hashcash was mentioned within the Bitcoin whitepaper.
Current Digital Currencies: The Creation Of Bitcoin
On October 31st the concept behind Bitcoin was first explained in an email to an email list of cryptography enthusiasts. The email was sent from Satoshi Nakamoto. It began with the following statement:
I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party. A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one person to another without the burdens of going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network…
The email went on to include a longer description of the new electronic cash system as well as a link to the Bitcoin whitepaper, titled “Bitcoin: A Peer-to-Peer Electronic Cash System”.
On January 3rd, 2009, the blockchain was launched and the genesis block was mined. A week later a test transaction was completed. For a few months the Bitcoin blockchain could only be accessed by early miners who were tasked with validating the blockchain. The first economic transaction took place more than a year later and occurred on May 22nd, 2010 when two Papa John’s pizzas were delivered to someone in Florida in exchange for 10,000 bitcoins.
Learning From The Past
In the history of digital currencies, each digital currency concept informed the next one, allowing newer currencies to build off of what was done before. The ability to innovate on what was done before and make improvements as new discoveries are made is one of the drivers of technological change, and it is these characteristics that allow new technologies to progress. In this sense, learning from the past enables the technology of the future.
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