how cryptocurrency started

How Cryptocurrency Started

Author: 
Kyle F.
Date: 
August 16, 2018
Read time: 
7 minutes
History
Cryptocurrency
Fundamental

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.

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
 

The earliest humans likely traded goods and services directly without any intermediary - a practice known as “bartering.”

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 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 of which instance you believe to be the “first,” 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.

 

Source: TransferGo Youtube Channel
 

The introduction of plastic
 

“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 especially because they are always looking to profit from their users by charging fees.   

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.

Source: exchangerateiq.com
 

However, DigiCash suffered from internal conflicts and a lack of recognition. 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.

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

 

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.

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.

The only way around this was to have a central authority to 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.

Source: mobilepaymentstoday.com
 

Like DigiCash, Bitcoin is an electronic cash system secured by cryptography - but Satoshi Nakamoto was the first to introduce 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 decentralize its ledger, a model which made it immutable and greatly improved its security.

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 scarce and valuable.

Nakamoto 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 that 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 personal information from its 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.

Source: CuriousInventor Youtube Channel
 

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.

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
 

It didn’t take long for other blockchain technologies that were modifications of Bitcoin’s design to arrive. They possessed different properties and peculiar functionalities. They became referred to as altcoins. Some offer faster payments than Bitcoin, others offer more anonymity, and some of them intend to make the 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 processes complex contracts and programs without the aid of third parties.

Ethereum allowed people to create their own tokens via its smart contracts feature. This allowed Ethereum to introduce an entirely 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.

Source: CuriousInventor Youtube Channel
 

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.

The disruption has already started; those that inform themselves the most will reap the greatest benefits.

Find out more information on how to use cryptocurrencies.

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