Throwback Stories #6: Crypto Prehistory

Dominik Olech
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August 18, 2008. On this day, the domain “bitcoin.org” was registered. For many people, the history of cryptocurrencies began at that moment. But what was before?

We usually point at inventing a Bitcoin as a “day one” for the crypto industry. And no wonder, since this currency is the flagship of all digital assets, widely known around the world. But does that mean the whole idea of the cryptocurrency begins at that very moment? Let’s take a closer look at the cryptocurrency prehistory.

Back in the eighties

Our journey begins in the ’80. The era of many technological breakthroughs, with synthesizers ruling in the music industry, video games growing in popularity, and personal computers settling down in our homes. We all are at least familiar with that decade, because of the growing trend for nostalgic content (I’m looking at you, Netflix). But not many may know that the cryptocurrency history also has its roots here.

It all begins with David Chaum, an American scientist, and cryptographer. He came up with an idea of cryptographic electronic money, providing anonymity to users. Chaum published it on paper in 1983, simply calling it “ecash.” As he wrote in “Blind signatures for untraceable payments,” automation and digitalization was already in progress back then. 

Chaum was aware of the potential problems caused by this process. He noticed that it may provide third parties with many vital pieces of information about the buyer. He also saw a dangerous potential for money laundering and other criminal activities. Chaum came with the idea of using cryptography to secure payments.

The actual history of ecash began in 1990, with the foundation of DigiCash by Chaum. But it did not last long. Although the company managed to raise some funds, only one bank decided to give a try to ecash payment, and only to a limited extent. Lack of more significant interest caused the company to go bankrupt in 1998. Maybe DigiCash wasn’t a big success – but the idea of “ecash” laid the foundations for the further development of cryptocurrencies.

Governmental research

Chaum’s ecash wasn’t the only approach to the use of cryptography in the financial sector during this time. The one particular case which I want to share with you comes from a very unexpected source. Today, governments and entities related to them seem only to start realizing the importance of cryptocurrencies, and the scale of their usage as well. 

Some may think that national authorities have overslept the Bitcoin rush, and they will never adjust to this trend. But it wasn’t exactly like that – and the American National Security Agency is an excellent proof for it. For those not aware of the NSA works – the name says it all. The agency focuses on communications networks and information systems, so the digitalization of money also lies in its range of interests.

In 1996, the agency issued a paper called “How to Make a Mint: the Cryptography of Anonymous Electronic Cash.” It not only describes possibilities of digital payments but also proposes cryptography as a key for ensuring user’s anonymity and a way to avoid double-spending. NSA’s conclusions go beyond simple academic research. The document is easily available online, so you may take a closer look at it here and find out for yourself.

Crypto milestone

The consensus mechanism is a crucial aspect of every cryptocurrency. The most common one, proof of work, is also an invention dated back to cryptocurrency prehistory. The idea was proposed by Cynthia Dwork and Moni Naor in their work “Pricing via Processing or Combatting Junk Mail” in 1993, as a method of fighting with denial of service and other similar attacks on networks. However, the term itself was formalized by Markus Jakobsson and Ari Juels.

This solution forces the service requester to maintain some work (usually processing time of the computer), as a proof of the credibility. The task must be easy to check yet relatively hard at the same time. Although the idea has found an application as a real anti-spam measure, it went down to history as a consensus mechanism for Bitcoin.

But before being used by Satoshi Nakamoto, PoW had gained the attention of other crypto precursors. One of them, Nick Szabo, used this idea in his project of digital currency called “bit cold” in 1998. It was assumed that this idea is not only intended to solve cryptographic puzzles, but also create a public registry. Every new solution would be related to the previous one, which would prevent the double-spending of coins.

Szabo’s bit gold was never implemented, but the similarity of that idea for the further Bitcoin implementation made it the direct precursor of the Nakamoto coin. Some people even consider Nick Szabo as the true creator of Bitcoin – but such rumors were disowned by him.

The godfather of Bitcoin

However, the idea of using proof of work for digital money purposes was actually implemented before the Bitcoin launch. And the person who achieved this is needed to be mentioned in an article on the origins of cryptocurrencies. We’re talking about Hal Finney, cypherpunk, and early Bitcoin contributor. Starting as a video game developer, he soon became a key character in the nascent industry.

It was Finney, who managed to create a reusable proof of work for the first time. What differs his approach from other implementations of PoW in practice? In Finney’s system, once used coin could be exchanged for another one, without the need to repeat the work used to create it at first. It was a revolutionary idea because it brought (pre)cryptocurrency closer to a physical, minted token.

It was the only functional reusable proof of work until the Bitcoin came, and Hal Finney never gained any profit from developing it. Later on, he got involved in the development of an actual first cryptocurrency, including receiving the first bitcoin transaction from bitcoin’s creator. No wonder that he is claimed to be the Satoshi, considering his knowledge and involvement. 

Unfortunately, we will never learn the truth, because Hal Finney passed out due to complications of amyotrophic lateral sclerosis. But his legacy is an essential element of the cryptocurrency industry – and should never be forgotten.

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