Bitcoin was not a bolt from the blue
It is tempting to think Bitcoin appeared out of nowhere in 2008. In reality it stood on nearly thirty years of trial and error. Many people had tried to build "cash for the internet," and all of them had failed.
The dream of digital cash: David Chaum
In the 1980s the American cryptographer David Chaum imagined money that was as convenient as a credit card but as private as cash, so nobody could track what you bought. In 1990 he founded DigiCash and ran real trials with banks.
DigiCash went bankrupt in 1998. The reason was simple: a company ran the system. If the company fails, the money disappears with it. As long as someone sat at the centre, that weakness could never be removed.
The cypherpunks: defending freedom with code
In 1992 a group of programmers and mathematicians around San Francisco started a mailing list and called themselves cypherpunks. Their motto: privacy is something you protect yourself, with cryptography. Digital cash that did not depend on governments or corporations was one of their long-running obsessions.
Out of this community came the ideas that would become Bitcoin's building blocks.
- Hashcash (1997, Adam Back): a way to fight spam by forcing the sender of an email to do a small amount of computation first. This became the model for proof of work, proving honesty through effort.
- b-money (1998, Wei Dai): a design for money with no administrator, in which every participant keeps the ledger. It is the first reference cited in the Bitcoin paper.
- bit gold (1998 onward, Nick Szabo): a digital asset "dug up" through computation, much like gold. It was strikingly similar to Bitcoin but was never built.
- RPOW (2004, Hal Finney): an attempt to turn proof of work into reusable tokens. Finney would later become the first person ever to receive bitcoin.
The great obstacle was double spending. Digital data can be copied endlessly, so the same coin could be sent to two people. The usual fix is to have someone keep the ledger, but a central keeper brings back DigiCash's fatal flaw. Nobody had found a way to prevent double spending without an administrator.
Bitcoin’s ancestors
Twenty-five years of ideas,
finally joined together.
- 1983eCashDavid Chaum
- 1990DigiCashCompany-run; went bust
- 1997HashcashAdam Back
- 1998b-moneyWei Dai
- 1998bit goldNick Szabo
- 2004RPOWHal Finney
- 2008BitcoinSatoshi Nakamoto
2008: the financial crisis
On 15 September 2008 the investment bank Lehman Brothers collapsed and a financial crisis spread around the world. Governments spent vast sums of taxpayers' money rescuing banks, and central banks printed money on an enormous scale.
"Even money in the bank isn't safe." "Governments can create as much money as they want." In the autumn when many people were thinking exactly that, an email arrived on a cryptography mailing list descended from the cypherpunks. The sender's name was Satoshi Nakamoto.
31 October 2008
9 pagesOn Halloween, a paper landed on a mailing list. The author: Satoshi Nakamoto.
Chapter summary
- Bitcoin was preceded by nearly thirty years of attempts at digital cash.
- DigiCash failed because a company sat at its centre.
- The cypherpunk community produced the building blocks: Hashcash, b-money, bit gold and more.
- The unsolved problem was preventing double spending without an administrator.
- The 2008 financial crisis sharpened interest in a new kind of money.