Our mainstream cultural narratives usually feed upon our collective hero complex by retelling stories about singular people who invent technologies that change our ways of being and living. We like to credit Edison (and sometimes Tesla) with creating the light bulb without mentioning the early developers whose inventions laid the groundwork for Edison’s bulb, or how Whitney and Latimer’s improvements made lightbulbs affordable and practical to use around the world.
In reality, scientific and technological progress occurs thanks to the collective effort of multiple people and communities over time. So it won’t surprise you that even though Bitcoin, the world’s first cryptocurrency, was launched back in 2009, the invention of cryptocurrencies had already been in the making for a couple of decades by then.
In this informative article, we will take a deeper look at the history of cryptocurrencies and the developments that led to the emergence of a bustling digital assets economy.
Is Bitcoin Really the First Cryptocurrency?
Bitcoin inspired thousands of altcoins in the years following its launch, spearheading a cryptocurrency market worth trillions of dollars. However, many components of Bitcoin, as outlined in the Bitcoin whitepaper have been around for some time, having been developed by multiple people across several decades. Satoshi Nakamoto, the mysterious name behind Bitcoin, gave credit to developers who invented these concepts in the Bitcoin whitepaper and even suggested the following definition for Bitcoin when the Wikipedia page faced possible deletion:
“Bitcoin is an implementation of Wei Dai’s b-money proposal http://weidai.com/bmoney.txt on Cypherpunks http://en.wikipedia.org/wiki/Cypherpunks in 1998 and Nick Szabo’s Bitgold proposal http://unenumerated.blogspot.com/2005/12/bit-gold.html.”
Now, let’s delve deeper into the history of cryptocurrencies and explore the trailblazing ideas that led to one of the most interesting financial developments of the 21st century.
Ecash and DigiCash
David Chaum, an American cryptographer and one of the earliest proponents of digital money, came up with designs for an anonymous cryptographic electronic payment system back in 1983. Chaum conceived the idea for “Blind Signature Technology”, a cryptographic tool that could be used for untraceable currency transactions. In 1989, he put the theory to practice and founded DigiCash, an electronic payment company that used public and private key cryptography and blind signature technology to ensure users’ privacy.
DigiCash allowed people to make micropayments with low transaction fees over the internet. It was an innovative solution that allowed people to make transactions without credit cards. Unfortunately, the company couldn’t grow its user base and DigiCash filed for bankruptcy in 1998. Chaum marked up the company’s failure to the fact that the e-commerce market hadn’t been fully integrated within the internet at the time. Despite the eventual bankruptcy, DigiCash was an important first step towards the development of cryptocurrency as we know it today.
In 1997, a British cryptographer and cypherpunk named Adam Back proposed the idea for a spam filter algorithm that would prevent denial-of-service attacks. In 2002, he released a detailed paper on the implementation of HashCash and suggested it could be used as a minting mechanism for Wei Dai’s B-money electronic cash proposal. B-money didn’t take off, but Bitcoin adopted Back’s proof-of-work algorithm for the Bitcoin mining process with Satoshi Nakamoto crediting Back in the Bitcoin whitepaper.
In 1998, 22-year-old engineer Wei Dai sent a paper outlining an electronic cash system that would run on a pseudonymous network to a cypherpunk’s mailing-list. Although quite short in length, the B-Money paper offered a theoretical application of Tim May’s crypto-anarchy ideology to payment systems, featuring protocols for community-based money creation and collective ledger keeping.
While B-money never took off beyond the initial idea, Wei Dai’s ideas regarding proof-of-work and proof-of-stake protocols, as well as B-money’s reward scheme for the community of verifiers, closely resemble the blockchain technology articulated in the Bitcoin whitepaper.
Wei Dai went on to build the free and open-source Crypto++ library in 1995, though he no longer worked on developing B-money. Satoshi Nakamoto emailed Wei Dai in 2008, asking him the exact year of publication for the B-money paper to cite it in the Bitcoin whitepaper.
The smallest denomination of Ether, Ethereum’s native cryptocurrency, is named Wei, as a tribute to his contributions to the development of digital currencies.
Roughly around the time, Wei Dai wrote to cypherpunks about B-Money, Nick Szabo published an essay detailing a decentralized digital currency named BitGold on his blog. Szabo’s formulation included a decentralized proof-of-work protocol to validate time-stamped blocks of transactions.
Szabo, who had worked for DigiCash as a contractor, revisited the BitGold idea in the spring of 2008 with a post entitled BitGold Markets, where he described how BitGold would function and how a BitGold market could potentially replace gold as a store of value. His formulation included solving mathematical puzzles that ranged in difficulty to back the scarcity of the BitGold. In response to comments, Szabo wrote the idea was quite complex and would benefit from a demonstration, asking if anybody would like to help him design one.
The Bitcoin blockchain uses almost the exact mechanisms outlined by Szabo, something that led many people to suspect Nick Szabo to be either Satoshi Nakamoto or one of the people behind the mysterious name. It doesn’t help that Szabo changed the date of the blog post at some point to make it seem like he posted it after the publication of the Bitcoin whitepaper, although the Internet Archive, as always, keeps the records.
When Was Bitcoin Invented?
In August 2008, Satoshi Nakamoto registered the domain “bitcoin.org” and published the Bitcoin whitepaper soon after, in October 2008. The publication came right at the heels of the 2008 global financial crisis that started out in the US and sprawled into an international crisis that threatened the stability of world economies.
Titled Bitcoin: A Peer-to-Peer Electronic Cash System, the Bitcoin whitepaper brought together several concepts suggested by fellow cryptocurrency supporters and improved upon them to propose a compact system for building a peer-to-peer decentralized cryptocurrency.
Satoshi Nakamoto, the pseudonymous founder(s) of Bitcoin, mined the first Bitcoin block in January 2009, generating BTC for the first time as a mining reward. Known as block zero, the Genesis Block contained The Times’s January 3rd Headline “The Times Jan/03/2009 Chancellor on brink of second bailout for banks” which worked both as a timestamp and an ideological battle cry for the newly established digital currency.
The first Bitcoin transaction occurred on January 12th, when Hal Finney received 10 BTC from Satoshi Nakamoto.
In May 2010, 1 BTC was worth less than 0.01 USD. In about a decade, Bitcoin’s market cap grew exponentially, reaching over 1 Billion USD in April of 2021.
When Were Altcoins Invented?
The Bitcoin whitepaper and the open-source Bitcoin blockchain provided the blueprint for the development of digital currencies. Soon after the launch of Bitcoin, several others followed the footsteps of Satoshi Nakamoto to create new virtual currencies, thus giving birth to the cryptocurrency industry. These are known as altcoins or alternative coins, digital currencies that are created after the invention of Bitcoin.
Most altcoins mimic Bitcoin, both conceptually and in their use of blockchain technology. The first altcoin to follow the footsteps of Bitcoin was Namecoin, a peer-to-peer software for registering domain names, which was developed by the early Bitcoin community in 2011.
Roughly at the same time that Namecoin was launched, Charlie Lee developed Litecoin, a Bitcoin spin-off digital asset that closely resembled Bitcoin except for its shortened block processing time. Litecoin’s launch showed the possibilities inherent in cryptocurrencies beyond Bitcoin and gave inspiration to crypto enthusiasts to explore blockchain technology to come up with new digital assets and new potential functions.
However, it wasn’t until 2015 that the world witnessed a truly original take on the possibilities opened up by the invention of blockchain technology. Ethereum, an open-source ecosystem for decentralized apps, came into the cryptocurrency scene offering to be more than a cryptocurrency. Ethereum features included smart contracts, which allows the platform to become a decentralized marketplace that runs on its own native currency, Ether (ETH). The vision Ethereum offers appealed to both small startups and industry giants like Microsoft, making Ether the second most popular digital asset in the world.
When Did Cryptocurrency Markets Launch?
Initial Bitcoin trading mostly took place on early Bitcoin forums. For example, Laszlo Hanyecz made his now-famous offer of 10,000 BTC in exchange for two pizzas on BitcoinTalk.
In 2010, Gavin Anderson launched a Bitcoin faucet, freely giving Bitcoin to promote the digital asset. Bitcoin Market, the first Bitcoin exchange service that used PayPal to mediate between sellers and buyers, emerged the same year. Mt. Gox, founded by Ripple (XRP) founder Mark Karpeles, started offering services soon after and grew to become one of the biggest cryptocurrency exchanges until it was brought down by a major hack in 2014.
The year 2011 marked the launch of the online black market, Silk Road, which exclusively accepted Bitcoin as payment. The US Government shut down Silk Road in 2013 and seized 1 billion US dollars worth of Bitcoin from the dark market.
The vulnerability of crypto exchange platforms and digital assets to cyber crime triggered the introduction of several cryptocurrency regulations by the authorities. Cryptocurrency exchanges, especially those that exchange fiat currency for digital assets like Coinbase and Binance, started to collect data from users in line with AML (anti-money laundering) measures.
While these measures allow people to easily purchase digital assets through their bank accounts and credit cards, the cryptocurrency community is somewhat divided on whether these regulations are helping adopt and spread cryptocurrency or are destroying one of the central tenets of the digital currencies – anonymity or at least, pseudonymity.
A Few Words Before You Go…
Hopefully, you enjoyed our retelling of the history of Bitcoin. This is, of course, an abridged version of the tale, and there are many more interesting tidbits and tangents about the invention of cryptocurrencies. Does knowing the breadth of work and inspiration that went into the creation of cryptocurrencies amaze you? We expect to witness more and more exciting developments regarding cryptocurrencies in the future as the cryptocurrency community grows, and with it, it’s potential. See you then!