Cryptocurrency has been around for more than a decade. Starting from Bitcoin which was practically worth nothing in its first year, the cryptocurrency community has now produced thousands of other altcoins that use identical technology — blockchain.
In this article, we provide a chronicle of all the events that contributed to the existence and acceptance of cryptocurrencies today. But before we discuss the history of cryptocurrency, let us first understand the context and the reason why people wanted to pursue this said asset class in its early days.
The Gold Standard
Only a few people today have lived through the times when our respective government-backed currencies were pegged to the price of gold. This is called the gold standard.
Many countries around the world based their monetary system on the value of a fixed quantity of gold. This began in the early 1900s in the UK, followed by many European countries and the US.
According to Britannica,
In an international gold-standard system, gold or a currency that is convertible into gold at a fixed price is used as a medium of international payments. Under such a system, exchange rates between countries are fixed; if exchange rates rise above or fall below the fixed mint rate by more than the cost of shipping gold from one country to another, large gold inflows or outflows occur until the rates return to the official level. These “trigger” prices are known as gold points.
One characteristic of gold-backed currencies is that each new money produced by the nation’s bank has to be backed by gold stored in its vaults. In other words, the government cannot print new money unless they have the gold to back them up.
A gold-based economy is beneficial because it is not subject to inflation. However, a number of events in the early 20th century made countries revamp their monetary system. Some examples are World War I from 1914 to 1918, the Great Depression from 1929 to 1933, and World War II from 1939 to 1945.
The UK and other countries abandoned the gold standard and printed as much money as they needed to keep their economies afloat during these tumultuous times, as well as to fund themselves during World War I and World War II.
The US followed the trend, a couple of decades after. During this time, President Richard Nixon announced that converting dollars to gold will not happen anymore.
Motivation of Early Crypto Adopters
Some people did not like the change, especially those that were against the government. They believed that this will prevent the US — and the world — from attaining some of the important universal values and goals that they desire.
J.R. Willett, a blockchain enthusiast who invented the initial coin offering (ICO), said in 2013 that “anarchists and hardcore libertarians love Bitcoin” and that those who do not fall in the said categories are “not in favor of completely doing away with their government.”
Willett said in a blog,
If you aren’t part of a fringe political movement, chances are there is something the government does that you like, whether it’s handing out entitlement money, killing enemies, putting people in prison, building dams and roads, funding research, or any number of other things. The government can do these things because the government can collect taxes, which in turn they can do because the flows of money are highly regulated and tracked at every level. Whether you are collecting a paycheck, buying furniture, cashing out investments, or simply dying and leaving an inheritance, the government knows about it and takes a cut.
Willett’s thought experiment reflects a part of the sentiment of many early Bitcoin adopters and evangelists. Many yearned for the creation of a purely decentralized currency.
As such, multiple attempts occurred decades before Bitcoin emerged.
Virtual Currencies Before Bitcoin
According to various sources, the first attempt of a virtual currency began in the 1980s in remote areas of the Netherlands. Petrol stations that service trucks overnight were favorite targets of burglars. Nevertheless, they had to stay open for the trucks to refuel.
A certain person suggested that money be put into smart cards that were being trialed at that time. Truck drivers carried these instead of cash, helping petrol stations to continue their operations without having any paper money, thus keeping them safe from robbery.
This also records the creation of the point-of-sale (POS) system.
American scientist and cryptographer David Chaum made another attempt. In 1981, Chaum published a paper that described an anonymous digital currency protocol. Eight years later, he developed it into a virtual coin called DigiCash.
Chaum introduced the so-called blinding formula, an extension of the Rivest-Shamir-Adleman (RSA) algorithm. Wherein, each coin’s mint signature maintains its form between peers.
Due to DigiCash’s overwhelming popularity, Chaum relocated to the Netherlands. He also employed some popular crypto personalities such as Nick Szabo, Niels Ferguson, and Bryce Wilcox-Ahearn, also known as Zooko.
Despite the media attention, Chaum’s company filed bankruptcy in 1998. He resurfaced in 2018 when he launched Elixxir, a cryptocurrency that he claims can process thousands of quantum-resistant transactions per second.
Chaum’s DigiCash inspired hundreds of other digital money startups, even though there were only a few of them that attained recognizable success. PayPal, for example, started in December 1998 and now one of the most trusted web-based payment platforms.
Other digital currency systems inspired by DigiCash also entered the scene. Some of their features became an inspiration to Satoshi Nakatomo, the person or persons who changed the world through Bitcoin. These predecessors are Bit Gold, B-money, and Hashcash.
After working with Chaum, Nick Szabo also started his own crypto initiative. In 1998 — the same year after Chaum announced his company’s bankruptcy — Szabo proposed another electronic currency protocol which he called Bit Gold.
As the name suggested, Bit Gold intends to attain the properties of real gold. Szabo also designed the protocol to remove the need for any centralized distribution and governance.
Contrary to DigiCash, Bit Gold failed to gain as much traction. However, it introduced its own implementation of Proof-of-Work (PoW). Initially, PoW aims to be a solution to denial-of-service attacks.
Created in 1993, Proof-of-Work became popular only in 2004. This is when computer programmer Hal Finney implemented it for digital money.
Roughly at the same time, world-renowned cryptographer Wei Dai introduced B-money. He described the project as both anonymous and distributed.
One thing that made B-money unique was the introduction of a means for enforcing contracts within the system without the need for any third party. Moreover, transactors create digital pseudonyms when transferring money with the use of its decentralized network.
Though considered revolutionary by some, B-money failed to gain traction as well. Others also thought that Dai was Satoshi Nakamoto, especially since the former is a renowned cryptographer, not to mention the Bitcoin whitepaper mentioned some B-money concepts.
Contrary to Bit Gold and B-money, Hashcash enjoyed relative success and media attention. British cryptographer Adam Back developed it in 1997. He associates himself as well with the RSA algorithm.
As a solution against Denial-of-Service in a number of systems, Hashcash came to life. Aside from this, people used Hashcash as an anti-spam tool for emails.
According to Hashcash’s official website,
[Hashcash] is used to create stamps to attach to mail to add a micro-cost to sending mail to deter spamming. The main use of the hashcash stamp is as a white-listing hint to help hashcash users avoid losing email due to content-based and blacklist based anti-spam systems.
Hashcash also implemented the Proof-of-Work algorithm for the creation of new coins. Later on, Bitcoin absorbed this concept for the creation of new coins.
On October 31, 2008, the pseudonymous entity named Satoshi Nakamoto published the Bitcoin Whitepaper. Registered a couple of months back, the public accessed the document at the Bitcoin.org website.
The whitepaper introduced Bitcoin as a “peer-to-peer electronic cash system”. It allows “online payments to be sent directly from one party to another without going through a financial institution.”
News about Bitcoin spread on various groups and forums. The first Bitcoin supporters were cyberpunks, “anarchists”, and “hardcore libertarians”, according to Willett’s description.
Bitcoin’s Genesis block was mined on January 3, 2009. To put Satoshi’s money where his — or her or their — mouth was, he sent 10 BTC to programmer Hal Finney on January 12.
The Bitcoin fever intensified even further as many joined the fray. Many Bitcoin detractors emerged during this time as well.
The first-ever Bitcoin sale took place in 2010, which enabled the cryptocurrency to have real monetary worth. Prior to the sale, 1 BTC was practically worthless, except for the one transaction wherein a computer programmer paid 10,000 BTC for two Papa John’s pizzas.
Read More: Why Do Bitcoins Have Value?
Emergence of Altcoins
Shortly after Bitcoin’s Cinderella success, a number of other cryptocurrencies debuted including Litecoin and Namecoin in 2011. Dissatisfied with Bitcoin, developers start creating alternative tokens.
Fast forward to 2013 when a programmer named Vitalik Buterin introduced Ethereum, another cryptocurrency that tackles blockchain technology in a different way. Prior to his suggestions, the Bitcoin community was experiencing many disagreements regarding its technology.
In 2014, Ethereum launched its own crowdfunding, wherein its founders amassed a whopping $18 million.
While the community sees Bitcoin as an alternative to money, developers leverage Ethereum to make other cryptocurrencies and so much more.
Others saw Ethereum as a flawed system — just like Bitcoin at that time — but it opened the community to a bigger world of blockchain.
Now, crypto data sites list thousands of cryptocurrencies. The Ethereum blockchain operates most of these cryptocurrency tokens, on top of thousands of decentralized applications (DApps).
Read More: What is Ethereum?
Other Ethereum alternatives also exist today such as Tron, EOS, Tezos, and Neo.