The Quest for Electronic Currency—Before Bitcoin
As the World Wars cooled off, the United States and allied countries fought to retain a monopoly on strong cryptography. Despite the best efforts of the NSA, independent researchers re-invented public key cryptography during the 1970s. Throughout the ’80s, the US government fought a losing battle against the proliferation of strong encryption. Throughout the ’90s, the quest for electronic currency was tied together with the need for secure internet payments.
A number of such systems arose — as spirits and stock prices soared over the potential of eCommerce. When the bubble popped, the majority of those payment schemes popped too. Afterward, PayPal came to dominate internet payments, a position sealed by eBay’s acquisition of it. By this time, the infrastructure for credit card payments was also becoming well established. With online payments largely solved, the dream of digital cash was left mainly to the Cypherpunks. After 30 odd years, some trial and error, Bitcoin was born.
The Father of Digital Cash
Through the first half of the ’80s, David Chaum pioneered the fields of anonymous communications and digital currency. His first groundbreaking publication describes a method for secure anonymous messaging. The following year, Chaum graduated with a Ph.D. in Computer Science. His dissertation tackles a now-familiar problem:
“A number of organizations who do not trust one another can build and maintain a highly-secured computer system that they can all trust (if they can agree on a workable design).” -Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups
The same year, Chaum is credited with inventing digital cash with the publication of Blind Signatures for Untraceable Payments.
DigiCash and the Cypherpunks
In 1990, David Chaum founded DigiCash to provide secure anonymous payments — supporting the first-ever electronic payment, four years later. Around that time, Tim May published the cypherpunk mailing list’s unofficial FAQ, where Chaum’s 1985 paper “Transaction Systems to make Big Brother Obsolete” is included as recommended reading for aspiring cypherpunks — along with 1984, The Shockwave Rider, Atlas Shrugged, and True Names.
While David Chaum’s ideas inspired the birth of the Cypherpunk movement and other efforts to create electronic cash, DigiCash did not rise to success. Chaum was said to be hard to do business with, and require too much control over his creation. He reportedly turned down a $100 million offer from Microsoft, saying DigiCash was worth more.
The Rise of Internet Payment Schemes
By 1995, electronic payments emerged, evidenced by a comprehensive list produced by the World Wide Web Consortium. A number of these payment schemes included a digital token that could be authenticated independently of the issuer.
At this time, Researchers at the Information Sciences Institute of USC were creating a research prototype for an electronic payments system called NetCheque, having an anonymous payments layer called NetCash.
“NetCash strikes a balance between unconditionally anonymous electronic currency, and signed instruments analogous to checks that are more scalable but identify the principals in a transaction. It does this by providing the framework within which proposed electronic currency protocols can be integrated with the scalable, but non-anonymous, electronic banking infrastructure” -practical electronic currency on the Internet
Hashcash is a proof-of-work algorithm invented by Adam Back, in 1997. Because Hash functions require a predictable amount of computational energy, Back realized they provide a measure of energy spent, and could be used for the purpose of spam prevention. This method would allow users and services to charge a require anyone wishing to access a given service to use up some computational power, evidenced by a hash signature, called a stamp. This would pose no inconvenience for personal use, but would make automated use of the service costly. While Hashcash never achieved wide adoption, it inspired a number of currency schemes, is one of 8 references found in the Bitcoin whitepaper. Its inventor, Adam Back, has since worked on numerous crypto projects, and co-founded Blockstream, in 2014
In 1998, Wei Dai proposed B-money, an anonymous, distributed electronic cash system:
I am fascinated by Tim May’s crypto-anarchy. Unlike the communities traditionally associated with the word “anarchy,” in a crypto-anarchy, the government is not temporarily destroyed but permanently forbidden and permanently unnecessary.
Wei Dai builds upon the idea of HashCash, proposing what seems to have been a prototype for Bitcoin. Each transaction is broadcast to the entire network, and copies of the ledger are kept by its users. It also contains a seed of the idea for “slashing” that is used in Proof of Stake blockchains. Its users would place some currency in a deposit, subject to fines in the case of misconduct. Wei-Dai’s B-money is another one of the eight references found in the Bitcoin whitepaper.
Beenz, Flooz, and the Dot-Com Bubble
Beenz was an early click-working site that went online in 1998. Its users were rewarded for their attention with the Beenz currency. Following in the footsteps of Beenz.com, Flooz established a similar service a year later, in direct competition with Beenz. Beenz signed hundreds of partnerships and had as many as 1.9 million visitors near its peak. Published at the time, What’s it Like to Work at Beenz.com? reminds me of 2017’s ICOs.
“We operate outside the law… We go out for curry dinners and booze and a lot of other things I can’t mention. […] We’re a motley crew.”
Flooz had Whoopi Goldberg as a spokesperson and even began accepting Beenz in exchange for Flooz. For a while, it seemed that Flooz would become a dominant online payment scheme until the FBI informed Flooz that $300,000 of its currency was purchased with stolen credit cards. It didn’t take too long from that point before Flooz declared bankruptcy, Beenz following suit shortly after.
Other digital currency schemes also arose and fell throughout the dot-com boom. By the time the dust settled, online payments were largely solved. From that point, the quest for digital currency was left mainly to the cypherpunks.
Peppercoin was a cryptographic system for micropayments, Developed in part by Ron Rivest (the R of RSA), proposed at the RSA Conference in 2002. To overcome the cost of processing a multitude of tiny transactions, it paid out only occasionally, using statistics to determine a proportionally correct amount to send. Ingenious though the system may have been, micropayment schemes have universally failed to capture a share of the market.
Reusable Proof of Work (RPoW)
Hal Finney is another cryptographic legend who tried his hand at creating a proposal for cryptographic currency. In a 2003 message to the Cypherpunk mailing list, Hal proposes Reusable Proof of Work. Building upon Hashcash, Finney’s major innovation was making the PoW token re-usable. Rather than actually re-use them, each time a token changed hands, it would be destroyed, and a new token of equal value created in its place. According to an entry found in the Nakamoto Institute Github repository, RPoW was “a very sophisticated piece of software that would have been capable of serving a huge network, had it caught on.”
Nick Szabo began working out the idea of Bit Gold through correspondence on the Cypherpunk mailing list, starting around 1999. Szabo spent six years on the idea before making a public proposal, in 2005:
The problem, in a nutshell, is that our money currently depends on trust in a third party for its value.
Bit Gold builds upon Hashcash style PoW and refines B-money’s idea of a distributed database. Although Bit Gold never saw production, it’s clear that the Cypherpunks were getting closer to creating a digital currency that would stand the test of time.
Unlicensed Money Laundering
E-gold was among the earliest digital currencies, operated by Gold & Silver Reserve Inc. since ‘96, and the first digital payment system used by over one million people. By 2006, E-gold processed around $2 billion in transactions per year, having 5 million accounts when it was shut down, in 2008. The firm found itself the subject of several federal lawsuits involving “operation of an unlicensed money transmitting business” and “conspiracy to engage in money laundering.”
Gold Age Inc. was the Internet’s first digital currency exchange, founded by Arthur Budovsky and Vladimir Kats in ’99. In 2006, its owners faced charges in New York for operating “an illegal financial business.” The duo immediately fled to Costa Rica and opened shop with a new name, The Liberty Reserve. In 2013, the company was brought down by US Federal prosecutors, after an investigation spanning 17 countries.
From the cryptographers turned activists of the ’70s and ’80s, to the Cypherpunks of the ’90s. Reading the stories of cryptographers such as Whitfield Diffie and Martin Hellman, David Chaum, Phil Zimmerman, Tim May, Eric Hughes, Adam Back, Wei Dai, Hal Finney, Nick Szabo, and the others… I begin to feel that they are all Satoshi Nakamoto. Regardless of who wrote the whitepaper, Bitcoin is not the product of any one particular individual. Rather, it emerged organically from a community sharing common goals.
On October 31st 2008, Satoshi Nakamoto posted the Bitcoin whitepaper to the P2P Foundation forum:
I’ve developed a new open source P2P e-cash system called Bitcoin. It’s completely decentralized, with no central server or trusted parties, because everything is based on crypto proof instead of trust. Give it a try, or take a look at the screenshots and design paper