By some estimates, there are almost 2,240 cryptocurrencies and counting in existence. The most popular and well-known cryptocurrency in the world is Bitcoin. Most people, if asked, could probably name Bitcoin and perhaps another cryptocurrency.
However, most people may not actually be able to explain exactly what a cryptocurrency is, what the name actually means or the historical origins of digital currencies. An unknown individual known as Satoshi Nakamoto conceptualized Bitcoin in the aftermath of the global financial collapse of 2008. Bitcoin, which slowly spawned a global mania that reached its peak in December 2017, was introduced to the world in January 2009.
However, January 2009 may not be the world’s official introduction. The prototypical conceptualizations, theories and technologies that made Bitcoin and modern cryptocurrencies possible may have begun decades earlier. In fact, the theoretical origins of the modern cryptocurrency as we know it may go back as far as the early 1970s.
Nakamoto may have created Bitcoin, but the idea for digital currencies go back much further. So, before we delve into that history, let’s first explain exactly what a cryptocurrency is and what it does.
What Is a Cryptocurrency?
Cryptocurrencies are intangible, digital versions of fiat currencies. More specifically, they are cryptographically secured virtual currencies. Cryptocurrencies are sometimes referred to as digital currencies, although this is not a proper analogue. Digital currencies could refer to online tokens that are used in online video games and streaming platforms. Cryptocurrencies are virtual currencies that are protected by cryptography protocols.
Cryptocurrencies can’t be touched or felt. Instead of an actual wallet, they are stored in encrypted digital wallets. Digital wallets can be referred to as, “cold wallets,” or, “hot wallets.” Cold wallets can be thumb drives, offline hardware or secured pieces of paper that contain ownership details of cryptocurrencies. Hot wallets are digital wallets located on smart devices or desktop applications and in online exchanges that are actively connected to the internet.
Cryptocurrencies are created wholly online on a secure database platform. Most, though not all, cryptocurrencies are created through digital verification on a blockchain. Bitcoin is a prime example of this process, though other coins may have different cryptocurrency creation processes.
A blockchain is basically a digital ledger. Transactions initiated on the blockchain are only visible to users on the blockchain. These transactions are heavily and securely encrypted. It is the blockchain that validates, verifies and legitimizes transactions. They are not visible to anyone outside of the blockchain. This is where the name, “cryptocurrency,” comes from.
The concept behind cryptocurrencies is that people should be able to transact via digital currencies without interference, oversight or regulation from third parties. Fiat currencies are regulated, printed and controlled by governments, central banking authorities and regulatory bodies. Cryptocurrencies are not controlled or regulated by anyone. This is why cryptocurrencies are considered to be decentralized.
Many cryptocurrencies, like Bitcoin, are created online through a process called cryptocurrency mining. This is a process whereupon advanced computers and computing software are used to solve extremely complex mathematical equations. These advanced computers are colloquially known as “mining rigs.” It takes very advanced computers with a lot of computing power to solve these equations. Once the equation is solved, cryptocurrencies are offered as a reward.
Moreover, cryptocurrency creation and transacting are wholly anonymous processes. All cryptocurrency transactions are invisible to anyone outside of the blockchain platform. Outside of a blockchain database ecosystem, the identity of a person, business or entity transacting cryptocurrencies can be impossible to trace or verify.
The Historical Origins of Cryptocurrencies
The historical origins of the ideas and processes that eventually paved the way to Bitcoin and all other cryptocurrencies goes back decades. These ideas, processes and theories are separated by years, decades and even geography. Different ideas about digital money influenced other ideas. Different theories about prototype cryptocurrencies improved upon previous theories. Furthermore, processes concerning online encryption helped to influence and improve other processes concerning the digital transmittance of cryptocurrencies.
The first ideas and theories concerning cryptocurrencies were birthed in the 1970s and 1980s, in eras when the modern internet didn’t exist yet. Incrementally and over decades, these ideas would slowly influence, link and improve upon one another on the long road to the era of Bitcoin and cryptocurrencies.
The seminal theories for the encryption algorithms that would later shield the identities of cryptocurrency users and blockchain transactions originated in England and Boston, Massachusetts back in the 1970s.
The RSA Algorithm
The RSA algorithm is a computer program that encrypts and decrypts information and messages. It is this algorithm which allows for the creation of public keys, or alpha-numeric codes, which enable ownership, transfer and depositing of digital currencies. An RSA algorithm is an encryption-heavy and secure way to encrypt sensitive data, like financial information, via an unsecure medium, like the internet, before it is sent. RSA algorithms keep a cryptocurrency user’s information private and untraceable. Furthermore, the public keys that users generate can be used a de facto form of verification and identification.
Dr. Clifford Cocks is a British mathematician and cryptographer who conceptualized the formulaic and theoretical groundwork for ideas that would eventually bring about the RSA algorithm in 1973. Dr. Cocks’ work was not publicly revealed until 1977. However, the RSA algorithm is actually named after Ron Rivest, Adi Shamir and Leonard Adleman. The trio published a research paper formally introducing the RSA algorithm at the Massachusetts Institute of Technology in 1977.
Netherlands E-Cash and Point-of-Sale Connection
Gas stations in the Netherlands were being routinely robbed in the early 1980s. To deter robberies, physical cash was converted to a form of smart cards with e-cash amounts transferred onto them. This development is the first historical realization of electronic cash, although the advent of the modern internet was still well over a decade away. Meanwhile, a noted business retailer named Albert Heijn began championing for a new process to allow consumers to pay for their purchases via bank account interfacing.
In these instances, the ideas for electronic cash and point-of-sale transactions were born. Though not directly connected, these developments act as manifest prototypes for cryptocurrency functions that would occur decades later.
David Chaum and DigiCash
David Chaum is an American cryptographer and businessman who created a working prototype version of electronic cash that he called, “DigiCash,” in 1997. Chaum’s ideas for DigiCash originated in personal theories he started in the early 1980s. Basically, Chaum’s idea was to create a secure, tokenized version of money that could be securely and electronically transmitted by banks and financial institutions. Chaum was not successful in his endeavors. Digicash went out of business by 1999.
Although Chaum’s ideas may have been a little ahead of its time, the main problem may have been his available resources and influential reach at the time. PayPal launched the year after DigiCash.
Wei Dai is a computer scientist who wrote about a theoretical form of electronic currency called, “B-Money,” in 1998. The thesis for B-Money elaborated on the creation of an, “online economy,” that could not be taxed or regulated by government or third parties. Satoshi Nakamoto cited Dai’s theories on B-Money as a major influence in the creation of Bitcoin. Dai was even cited in Nakamoto’s whitepapers on Bitcoin.
B-Money as a cryptocurrency was never actually created and exists only as a theory. Dai acknowledged that it wasn’t fully practical for mass use. However, some of Dai’s ideas would significantly influence the operating functions of Bitcoin.
Dai theoretically proposed the constantly updated digital ledger, an idea that would later become the blockchain in Bitcoin. Dai also theorized seminal ideas for Proof-of-Stake and the smart contract in his proposal for B-Money. In effect, the theoretical B-Money was indeed the actionable prototype that eventually became Bitcoin as well as the groundwork for how cryptocurrencies function and are transacted online.
PayPal, the electronic online payment system, was introduced to the world in 1998. Its influence on the creation of digital currencies are more indirect but no less important. The advent of PayPal made online users more accustomed to and less wary of the idea of transmitting money online and in a non-tangible way.
Adam Back is a British cryptographer who created the prototype for proof-of-work (PoW). His programming creation, HashCash, can greatly reduce aggressive email spam and denial-of-service notices through pricing function protocols. This protocol influentially birthed the idea of using aggressive processing power for PoW functions, like cryptocurrency mining. In a 2002 paper, Back explained that HashCash denial of service were envisioned to make spammers, who send innumerable amounts of junk mail daily, expend incredible amounts of processing power to succeed in their goals.
The HashCash protocols would become widely used as anti-spamming programs by corporations and businesses. The PoW programs underlying HashCash became the working theoretical influences that would be used by Nakamoto to create the cryptocurrency mining and block creation programs of Bitcoin. HashCash is one of the few influences directly cited in the Bitcoin whitepaper. Back created HashCash in 1997.
Hal Finney and Reusable Proof-of-Work
Hal Finney was a video game programmer, computer scientist and working contemporary of Nakamoto. Finney was the world’s first recipient of Bitcoins as sent to him by Nakamoto. Finney created the reusable PoW (RPoW) programming concept built on ideas first theorized by Cash’s work on HashCash. Finney’s own seminal work on cryptocurrency theory began as far back as 1991. His RPoW allowed for cryptocurrency tokens to reused from user to user.
The world was first introduced to the idea of Bitcoin in a whitepaper published on an internet forum in October 2008. The paper is titled, “Bitcoin: A Peer-to-Peer Electronic Cash System.” The narrative thrust of the whitepaper is the creation of a trustless, digital currency that can be transacted and transferred from user to user. After the debacle of the 2008 global financial crash, Nakamoto wanted people to use digital currencies that could not be controlled or regulated by governments or regulatory bodies.
The paper was written by a person under the pseudonym Satoshi Nakamoto. Some analysts believe that Nakamoto may actually be a pseudonym representing a group of computer scientists, programmers and developers who worked on the concept of Bitcoin. Neither theory has ever been conclusively proven.
The paper goes into length detailing how a cryptocurrency would work, how it will be coded and how it would work in a blockchain enclosed database ecosystem. In January 2009, the Bitcoin genesis block was created.
The Long Road to Bitcoin and the Cryptocurrency Age
Without the seminal theories of the RSA algorithm, there would be no way to encrypt the sensitive information regarding individuals who transact in cryptocurrencies. The real-world manifestations of electronic cash and point-of-sale in the Netherlands acted as the working prototype functions of cryptocurrency technology that would come decades later.
DigiCash and PayPal would incrementally condition the general population to trust financially transacting online, and later on, transacting in cryptocurrencies themselves. The prototypical theories of B-Money, the PoW protocols of HashCash, and Finney’s RPoW protocols influenced by HashCash, contributed influentially to the creation of Bitcoin.
These varied, disparate and mostly disconnected ideas, theories and people would link together over decades and geography to contribute to the creation of cryptocurrencies as we know them today.
While cryptocurrency mania has certainly plateaued, the public’s fascination with cryptocurrencies has yet to diminish. There have been theories that the cryptocurrency may even one day replace fiat currencies. Numerous government agencies, central banks and businesses are hastily trying to incorporate blockchain technology into future applications for financial transmittance even as they downplay the importance of cryptocurrencies in current financial infrastructures.
Whether or not cryptocurrencies will ever replace fiat currencies remains to be seen. What is certain at this point is that the cryptocurrency is here to stay. The cryptocurrency has revolutionized how investments are transacted on a global scale. However, the limits of their influence on the world and the financial industry have yet to be revealed.