How Cryptocurrency Started

Written by

Tamara T.

Senior Writer

 

Words like “Cryptocurrency,” “Blockchain,” and “Bitcoin” went from completely unknown to mainstream in the space of less than a year. With cryptocurrencies quickly gaining adoption by large institutions and receiving attention from mass media, many people are starting to see their potential to play a huge role in our future. But what about their past? In this blog, we’ll take a look at where cryptocurrencies came from and how they started.

Since cryptocurrencies are a digital form of money, we’ll begin with a brief history of money itself.

A brief history of currency

A famous example from many introductory economics classes involves two people on an island. One of them is skilled at fishing and the other is skilled at harvesting coconuts. The fisherman trades fish for coconuts and the coconut “farmer” trades his coconuts for fish. At some point, though, a third skilled person inevitably enters the situation.

The third person is skilled at hunting. He wants to trade his meat for coconuts, but the coconut farmer doesn’t want meat. Bartering is no longer viable. Now, the island people need a “medium of exchange.” They need money.

Sources disagree with one another about the first true medium of exchange. Some sources will cite China’s use of miniature tools in 1100 BC as the first currency. Others point to the coins created by King Alyattes of Lydia in 600 BC. Regardless, somewhere along the way, humans began using currency as a medium of exchange.

The first use of paper currency is usually attributed to the international trade that took place in 17th century Europe. Wire transfers facilitated by Western Union’s telegraph network occurred as early as 1872
 

The introduction of plastic

charg-it brochure

“Charg-it” was the first actual bank card, issued in 1946 by a bank in Brooklyn - but it only allowed individuals to make local purchases. The first widely accepted credit card wasn’t introduced until 1950 by the Diners Club Inc. In 1958, the American Express Company introduced another major card which was used for travel and entertainment purposes.

A decade later, credit cards had become commonplace and new improvements were added; magnetic strips were introduced in the 1960s to make cards easier to use and chips were implemented after 1990 to improve security.

1989 and beyond: When did cryptocurrency begin? When did blockchain start?

Before 1989, every iteration of currency and improvement made to it can be seen as an advancement aimed at making payments faster, easier, and more secure - and they were effective. However, every form of currency discussed thus far - coins, paper money, credit cards - relies on a centralized third party to operate. The peer-to-peer nature of bartering was sacrificed with the adoption of currency. Third parties need to be trusted - and they’re always looking to profit from their users by charging fees.

international wire transfers

David Chaum, a computer scientist, changed the history of money in 1989 by introducing DigiCash. DigiCash was a cryptographic electronic payment system that allowed people to send money securely and anonymously. The ecosystem had two currencies: eCash and Cyberbucks.

DigiCash was, in essence, the first cryptocurrency. The system made use of an email mailing system for trading, and off-market exchanges reportedly took place between traders. It enjoyed support from libertarians and other groups who advocated an international payment system that wasn’t under government control. It came close to becoming the conventional online payment system.

However, internal strife and a lack of recognition befell DigiCash and it failed. David Chaum left the company in 1996 and the firm filed for bankruptcy two years later. Its assets were sold to eCash Technologies which was acquired by InfoSpace in 2002.

David Chaum quote

Flooz was another virtual currency in the late 1990s that died in 2001 due to dwindling support and a host of criminal activities on its platform. Other ideas of an online payment system with secured ledgers such as B-Money and BitGold were formulated but not implemented. Then out of the midst of it all, Bitcoin emerged.
 

2008: The Problems Bitcoin Solved

Pre-2008, online payment systems had a major problem apart from privacy - double spending. Because digital transactions and signatures were electronic, perfect copies could be made multiple times and re-executed by anyone with access to the ledger recording transactions.

bill payment methods

The only way around this was to have a central authority verify transactions on a highly-guarded ledger. But this didn’t get rid of centralization and the security concerns it brings nor the need for trusted third parties who charge high fees to verify transactions.

In the aftermath of the 2008 economic meltdown, Satoshi Nakamoto, an anonymous individual (or group of people, possibly), solved the problem of double-spending and introduced Bitcoin to the world.

Like DigiCash, Bitcoin is an electronic cash system secured by cryptography - but Satoshi Nakamoto introduced decentralization and the idea of blockchains.

Ideally, payment systems are made up of a number accounts, currencies and a ledger that records transactions in the system. Bitcoin uses cryptography to encrypt and secure its accounts and then decentralized its ledger, using a model which made it immutable and greatly improved its security.
 

Bitcoin: a peer to peer electronic cash system

Instead of having one centralized ledger, Bitcoin introduced a network of identical and immutable ledgers which record every transaction in the system. Each member of the network holds a copy of the ledger, and verifies and adds new transactions to it by following a set of consensus rules. If a member goes against the consensus or possesses a ledger different from other members, it is rejected. This immutable ledger is called a blockchain.

In order to create a free-flowing currency of value, Bitcoin introduced scarcity. Certain members of the network are rewarded with a cryptocurrency (called Bitcoin) when they solve complex mathematical computations. This process is called mining. The system is designed in such a way that only 21 million Bitcoins can be mined, making the cryptocurrency effectively scarce and valuable.

Nakamoto was skeptical about the idea but launched the system in early 2009. It met a lot of skepticism at first but was gradually embraced by the world. As of mid-2018, Bitcoin is worth thousands of dollars with experts saying its price has the potential to rise to hundreds of thousands of dollars.

Unlike traditional payment systems, Bitcoin provides a great deal of anonymity, even while staying transparent. Because it doesn’t require the personal information of users, governments can’t monitor citizens’ financial dealings on the system, although transactions are broadcasted publicly. It also provides better security due to its decentralized nature and the use of cryptography to encrypt user information.

The more people understand Bitcoin and how it works, the more interested they become in the technology. Bitcoin appeals to people because it offers peer-to-peer transactions apart from user-to-merchant transactions and removes the need for trusted third parties.

popularity of google search terms

As a result Bitcoin’s, blockchain technology and decentralized nature brought about astounding use cases and ushered in a new age of cryptocurrencies.
 

Blockchains and Cryptocurrencies now: Ethereum, other altcoins and ICOs

Blockchain and cryptocurrencies now

In no time, blockchain technologies that were modifications of Bitcoin’s design arrived. They possessed different properties and peculiar functionalities and became referred to as altcoins. Some offer faster payments than Bitcoin, others more anonymity, and some of them intend to make creation of custom blockchains easier. Litecoin, Ripple, Monero and Ethereum are among the most prominent of these cryptocurrencies.

Ethereum, founded in July 2015 by Vitalik Buterin, a Russian-Canadian programmer is the most popular altcoin. It focuses on a new technology called smart contracts. Apart from validating online transactions Ethereum also verifies so-called states and processes complex contracts and programs without the aid of third parties.

evolution of gas used by ethereum network

Ethereum allowed people to create their own tokens via its smart contracts feature. This made it a family of cryptocurrencies and ushered in a new use of cryptocurrencies - crowdfunding. Enterprises create custom token via Ethereum and sell them (usually to the public) to fund their projects in what is called an Initial Coin Offering (ICO). These custom tokens can be sold at a later date or used for some functionality the project will offer in the future.

cryptocurrencies

There are over 1,500 cryptocurrencies in existence today and the list is growing. Blockchains - secure, immutable ledgers that store unchangeable information, have found use cases in many facets of the global industry, economy, and society. The technology, although still at a nascent stage, holds massive potential to disrupt many industries and greatly affect our everyday lives.

Cryptocurrencies are 21st century technologies that illuminated the forgotten meaning of value and introduced a payment system never seen before to transfer it. Cryptocurrencies have the potential to disrupt a number of industries in the world and reshape life on earth.

That’s probably why people can’t stop talking about them.