History of Cryptocurrencies : Is Bitcoin Really the First Cryptocurrency?

The year 2008 ended in gloom across the global financial markets. Stock indices across the world had lost half of their value in a matter of months.

Billions of dollars in taxpayers’ money were being ploughed into the bailouts of “too big to fail” banks. This seemed inevitable after the USD 600 billion, 150 years old gorilla that was the Lehman Brothers filed for bankruptcy in September 2008.

On 3rd January, 2009, the Times ran a front-page headline about the UK Treasury –

“Chancellor on brink of second bailout for banks”

That date and the headline are well-known among the crypto community. That was the day when Bitcoin’s genesis block, or the very first block on its blockchain, was created by Satoshi Nakamoto. The date and the headline were also written into the genesis block. Since the blockchain is immutable , it will be a permanent reminder of the circumstances in which the digital currency revolution was born.

A few months before Bitcoin came into existence, Satoshi circulated its whitepaper on an obscure online mailing list called “Cypherpunk”. The seminal whitepaper described the use of cryptography and proof of work to tackle the double-spending problem .It also talked about the users placing their trust on a chain of blocks without a central authority.

Fun Fact: The Bitcoin white paper didn’t mention the words “decentralized” and “blockchain” even once!

But is Bitcoin really the first ever digital currency concept? Not at all. Let’s look at some of the ancestors of Bitcoin that paved the way for its creation over the decades.

1. Ecash

Ecash was launched in 1990, by a company called Digicash. Its founder, David Chaum, had laid the groundwork of Ecash in a whitepaper way back in 1982.

Fun Fact: Ecash was launched before Vitalik Buterin (Ethereum’s founder) was even born!

His paper expressed concerns about customer privacy in electronic payments, at a time when the World Wide Web had not been invented and most people did not even have a PC. Ecash proposed to solve the user privacy problem using cryptography and digital signatures, which are also incorporated in Bitcoin. The intention was for parties to be able to share proof of payments without revealing personal information. However, Ecash could not solve the double spending and centralization issues, as it relied on the banks to settle payments.

Eventually, Digicash could not compete with the convenience and growing popularity of credit cards. Also, users in 1990’s didn’t really care that much about privacy. The corporation declared bankruptcy in 1998.

2. Hashcash

The concept of Hashcash was first proposed by Dr. Adam Back in 1997, and further developed by him into a paper published in 2002.

The concept introduced the idea of proof of work, adding a computational cost to functions such as email to detract spammers. Hashcash is even referenced in the Bitcoin whitepaper, as a source of inspiration for the proof of work used in Bitcoin. However, Hashcash proposed maintaining a central database to monitor double spending, an idea that was greatly improved by Bitcoin’s decentralized blockchain.

3. B-Money

Wei Dai, a computer engineer, introduced B-Money in 1998, a year after Hashcash. B-money pioneered the idea of de-centralizing the ledger and money supply.

To eliminate the need to trust a central party, it proposed a mechanism for users to broadcast transactions and all or some of the participants to maintain the ledger. Senders and receivers were to be identified with public keys so that the users of the network remained untraceable.

The system also allowed any user to create money by solving computational problems, similar to the concept of mining in Bitcoin. Similar to Hashcash, Bitcoin’s whitepaper also references to B-Money as a source for its core ideas. 

4. Bit Gold

Bit Gold (not to be confused with Bitgold, the Bitcoin hard fork) was conceptualized by Nick Szabo around the same time as B-Money. Its core structure was the closest to Bitcoin itself, because of which many people suspect Nick Szabo to be Satoshi. Of course, he has denied those claims.

With Bit Gold, Nick hoped to create an online token with the unforgeable scarcity of precious metals like gold. A distributed registry (similar to the blockchain) was required to be maintained across different servers. Transactions were required to be timestamped and digitally signed, similar to how they work in Bitcoin.

Nick Szabo was prescient about the problems with proof of work, predicting that low-cost producers would eventually make solving computational problems cheap. Bitcoin partially solves this by automatically adjusting the difficulty level, so that blocks are compiled at fixed intervals and the miners can’t flood the market with Bitcoins.

Bit Gold had an implementation in the form of a software code, called RPOW, developed by Hal Finney. He later became one of the pioneers of Bitcoin. Incidentally, he also received the first ever Bitcoin transaction from Satoshi Nakamoto.

Conclusion

The above list is by no means exhaustive. There were other projects that were attempted with mixed success. Cybercash, a US-based payments company, launched Cybercoin in 1996, an electronic cash system for micropayments. It forged partnerships with several banking and tech titans, but ultimately failed with the company going bankrupt in 2001.

It is obvious that Bitcoin drew a number of inspirations from the above-listed projects. Having learnt from their limitations, it appears to all the right ingredients to create a viable currency with the potential for mass adoption. However, the same was once thought of Ecash and its parent company Digicash. The company raised millions of dollars in venture capital and people believed it will one day popularize micropayments and online money.

“Will Bitcoin chart a different course and be used someday as a true medium of exchange? Will there be another successor – Vitalik’s Ethereum or something else – which will take over as the dominant force in cryptocurrencies? Or will the idea of decentralized currencies fizzle out and be relegated to financial history books as a passing fad? We will be watching this space closely!”