Cryptocurrency has continued to gain popularity over the past decade, ever since it first launched 13 years ago. However, the story behind it goes far beyond 2008.
There are over 5,000 different cryptocurrencies in circulation today since the launch of Bitcoin 13 years ago. Cryptocurrency is a decentralized digital currency, encrypted by blockchain and has risen in popularity and value since it became publicly traded in 2009. Cryptocurrency allows people to send payments to one another without the need of a third party, such as banks or credit card companies, providing greater speed and privacy for transactions.
Coming to prominence in 2008 during the Great Recession, the digital currency provided an alternative to traditional banking systems, which left many disillusioned. However, the foundation for cryptocurrency started in the 1970s, as a culmination of efforts by activists and scientists to eliminate bureaucracy and protect the right to privacy. Read on to find out more about the development of cryptocurrency and its significance for business today.
In 1976, Ralph Merkle, a computer scientist, produced the idea of the Merkle tree or hash tree. This was a framework for structuring data in computer applications, allowing it to be encoded more efficiently and securely. His concept inspired the creation of blockchain technology, which is the backbone of cryptocurrency.
Merkle’s work inspired two cryptographers, Whitfield Diffie and Martin Hellman, who published a white paper called New Directions in Cryptography. This was a groundbreaking paper that went into depth about the theory of public cryptography. Originally, cryptography was researched only in secret by government agencies, which posed a problem for the duo while they were doing their research, as they would face resistance from law enforcement and spy agencies alike, who threatened them with imprisonment.
Nevertheless, Diffie and Hellman persevered, determined to find a way to distribute keys (to both encode and decode data) publicly without the expense or risks of having a centralized model. A system would be needed to allow people to exchange information securely with one another while remaining anonymous, and thus the Diffie-Hellman protocol* was born. This protocol made the internet and other electronic communications possible today.
*The duo would later win an Association for Computing Machinery Award in 2016 for their groundbreaking contributions to cryptography and the world of the internet and e-commerce.
Computer scientist and cryptographer, David Chaum, published Blind Signatures for Untraceable Payments in 1982, proposing mathematically encrypted payments. Similarly to cryptocurrency, the payer would be untracked by banks or the government, but would still rely on banks as their third party for payment verification. Hoping to profit from his theory, Chaum created eCash in 1983, a digital currency utilizing blind signatures. This allowed consumers the ability to make transactions anonymously and securely, making it the earliest prototype of modern cryptocurrency.
Chaum later founded Digicash, headquartered in Amsterdam in 1989, securing several partnerships with banks in Europe, the United States and Australia by 1996. However, the company collapsed in 1998, unable to convince banks to invest in the technology.
Writer and computer engineer, Wei Dai, detailed the roots of modern cryptocurrency in 1998. He dreamed of a world where violence would be prevented by obscuring the identities and locations of people, making governments unnecessary. Subsequently, he proposed b-money, a distributed and anonymous electronic cash system, using proof-of-work systems that would utilize servers to track, verify and manage transaction data for transparency and security. A public digital ledger would record and organize the transactions, allowing users to verify that conditions had been met before exchanging data or money without any third-party involvement.
Cryptocurrency today uses many of the features that Dai conceptualized, which includes public keys that users could use to encode and decipher the information, as well as enforce contracts from anywhere in the world. While b-money was never created, the framework served as the foundation for Bitcoin in 2008.
A white paper under the pseudonym Satoshi Nakamoto was published, providing the fundamentals of blockchain. The paper described the shortcomings of the current payment system, namely that banks sent money with costly fees. While merchants collected sensitive information of buyers to avoid fraud, this not only undermined the privacy of the user but also made transactions far less efficient because they required verification by a third party. An alternative form of payment was theorized, utilizing a digital public ledger and proof-of-work for transparency and trust, while obscuring the identities of users. Shortly after, Bitcoin was born, with an early and growing group of supporters trading and mining the cryptocurrency. It was the first public digital currency with a decentralized model, anonymity and blockchain for record-keeping, and has expanded immensely since its launch.
Cryptocurrency, like so many other inventions, was based on the foundational work created decades before their most popular technologies were born. Motivated by a desire to optimize processes and protect privacy rights, cryptographers and scientists sought to make the transfer of data faster and more secure to empower consumers and businesses alike. These milestones were key to providing the blockchain technology and framework needed to make cryptocurrency the success it is today, changing the world as we know it.
ABOUT THE AUTHOR
Nefertari Bilal serves as TBI's Content Marketing Specialist. Raised in New York City, Nefertari moved to Chicago to complete her bachelor's degree in journalism at Northwestern University in 2020. An avid and curious writer, Nefertari is passionate about studying complex topics and explaining them in an engaging, impactful way. Her personal motto is, "feel the fear and do it anyway." In her spare time, Nefertari bakes keto treats, creates podcasts and short stories, as well as supports the local theater. You can reach Nefertari at firstname.lastname@example.org or connect on LinkedIn.