Cryptocurrencies are becoming more mainstream as time goes by and they are often hailed as the next big thing in finance by the popular media. The truth is, cryptocurrencies have been around for a long time.
We prepared a short historical guide on the invention of cryptocurrencies. Whether you are a history buff or a cryptocurrency enthusiast who wants to learn more about the evolution of digital assets, this guide will help you develop a better understanding of where virtual currencies come from and where they are headed towards.
Is Bitcoin Really The First Cryptocurrency?
Bitcoin is often celebrated as the world’s first cryptocurrency that inspired thousands of altcoins. However, the idea of digital money and cryptocurrency existed long before Bitcoin’s 2009 debut. Let’s delve a bit deeper into the history of cryptocurrency invention and look at how the concept of digital money evolved into a market worth trillions in just a couple of decades.
In 1983 an American cryptographer named David Chaum started conceptualizing an electronic payment system based on digital tokens. Chaum developed Blind Signature Technology, a cryptographic tool that would ensure private and untraceable currency transactions. He founded DigiCash, an electronic payment company that used public and private key cryptography to secure transaction privacy back in 1989. Unfortunately, the company went bankrupt in 1998 – partly due to the narrow user base of the e-commerce market which was still in its infancy at the time. Despite the bankruptcy, the concepts Chaum put forward had a tremendous effect on the development of digital currencies.
Around the mid-’90s, Adam Back developed a spam filter algorithm called HashCash. HashCash employed a proof-of-work algorithm that would later be adapted to the Bitcoin mining process.
In 1998, around the time DigiCash went bankrupt, a computer engineer named Wei Dai published an essay that outlined a pseudonymous electronic cash system “B-Money” running on a decentralized network. Although Wei Dai’s B-Money never launched, it nonetheless set the standard for many of the cryptocurrencies we use these days.
Plans for B-money included a collective ledger and a community verification scheme that depended on an earlier version of the proof-of-work algorithm, as well as an alternative proof-of-stake protocol. B-Money also featured a “mining system” that rewarded the verifiers for their computational work and many other features that were later employed by blockchain technology. While B-Money never took off beyond the initial paper, it is often regarded as the conceptual birth of modern cryptocurrencies. Wei Dai and Satoshi Nakamoto exchanged emails before the latter published the Bitcoin Whitepaper, which also cites Wei Dai.
1998 seems to be a magic year for cryptocurrency history. Blockchain technology pioneer Nick Szabo outlined a decentralized digital currency named BitGold, roughly at the same time as Wei Dai’s B-Money. BitGold is generally accepted as a precursor to Bitcoin because both concepts shared similar ideas. For example, Szabo proposed time-stamped blocks generated through a decentralized proof-of-work protocol that would be validated by the network. This is essentially how the Bitcoin blockchain works, a fact that led many people to suggest Szabo is the mysterious Satoshi Nakamoto. In any case, BitGold never launched, and only a couple of months after Szabo announced on his blog that he would start developing BitGold in practice, the Bitcoin whitepaper was released.
When Was Bitcoin Invented?
The Bitcoin white paper was published in October 2008 by the pseudonymous Satoshi Nakamoto. Titled Bitcoin: A Peer-to-Peer Electronic Cash System, the whitepaper outlined the central features of Bitcoin, the world’s first actual peer-to-peer decentralized cryptocurrency.
The Bitcoin whitepaper mentioned many concepts initially suggested by several digital currency enthusiasts and tied them together in order to describe how Bitcoin would work. Bitcoin would be a decentralized digital ledger, composed of blocks of data that would be chronologically bound by cryptography, forming a chain of blocks (hence the name blockchain).
Bitcoin was officially launched in January 2009, when Satoshi Nakamoto mined the Genesis Block and produced the first mining rewards. The genesis block also included the text of The Times’s January 3rd Headline “The Times Jan/03/2009 Chancellor on brink of second bailout for banks”, alluding to the problematic role central banks played in the 2008 global economic crisis and Bitcoin’s rejection of centralized financial institutions.
In the following decade, many other cryptocurrencies that used the blockchain technology Satoshi Nakamoto described got to be launched, creating a booming cryptocurrency industry.
What Is Blockchain Technology?
We can say that what separates Bitcoin from the earlier attempts at creating a virtual currency comes down to Satoshi Nakamoto’s formulation of the Bitcoin blockchain. Both DigiCash and B-Money had struggled with solving the double spending problem without a central authority controlling the transactions. Blockchain managed to offer a viable solution to the problem by combining the proof-of-work (PoW) algorithm with a peer-to-peer (P2P) network.
In Satoshi Nakamoto’s design, in order to add a new block to the chain, a hash that’s equal or less than the block’s target hash must be found. The block target hash is calculated using the previous block’s time stamped hash, which means that anyone trying to tamper with a block has to alter all the previous blocks.
This ensures the security of transactions and prevents double spending without the need for a central authority monitoring the transactions.
When Were Altcoins Invented?
Altcoins refers to any cryptocurrency that isn’t Bitcoin. New cryptocurrencies entered the crypto market after the launch of Bitcoin. The first two to enter the game were Litecoin and Namecoin in 2011. Namecoin is a decentralized domain name system supported by the early Bitcoin developer community. Litecoin, on the other hand, is the first of many Bitcoin spin-offs and it is the world’s first true altcoin.
Litecoin was developed by Charlie Lee, who would later work at Coinbase as an engineering director. Litecoin’s code is nearly identical to Bitcoin but it has two important differences: a block can be processed in 2.5 minutes as opposed to Bitcoin’s 10 minutes and Litecoin uses the “scrypt” hashing algorithm unlike Bitcoin that uses “SHA-256”. These differences underline how many other altcoins would come to make their own mark in the digital asset markets by playing around with blockchain technology.
Arguably, one of the most innovative attempts came years later, with the launch of Ethereum. Ethereum is an open-source blockchain that supports decentralized apps and smart contracts on its platform. It also has its own native currency Ether. Ethereum designed its blockchain as an infrastructure that other digital projects and start-ups can run on, which makes it a popular choice among developers. Ethereum established partnerships with industry leaders, such as Microsoft. It is the second most popular digital asset in the world, with a market cap that is only rivaled by Bitcoin.
When Did Cryptocurrency Markets Launch?
The first Bitcoin exchanges emerged around 2010. Most notable were Bitcoin Market, MT. Gox. and the infamous Silk Road.
Users bought BTC through the Bitcoin Market, using PayPal to send U.S. dollars to the seller, and Bitcoin Market completed the transaction by sending the BTC once PayPal transactions could be verified.
Mt. Gox was founded by Jed McCaleb first as a Magic: The Gathering card trading site. In 2010, Mt. Gox became a Bitcoin exchange and it was sold to Mark Karpeles, while Jed McCaleb went on to conceive Ripple (XRP). Bitcoin prices on the Mt. Gox plummeted after a hack in 2011, though the exchange kept growing until it handled almost 70% of all global Bitcoin transactions. Unfortunately, it suffered another major hack in 2014 and consequently went bankrupt.
The Mt. Gox hack revealed the vulnerability of crypto exchange platforms and their digital wallets to cyberattacks, ushering in a new era of better cryptocurrency wallets and non-custodial exchange platforms.
Silk Road was launched in 2011 as the world’s first darknet market. While it wasn’t a Bitcoin exchange platform, it used Bitcoin for illegal transactions and money laundering activities. The FBI shut down the digital black market in 2013, but the association of Bitcoin with digital crime, unfortunately, left a stain on the digital asset’s record.
Digital cryptocurrency exchanges have increasingly become more regulated since their initial conceptions. Most centralized cryptocurrency exchanges require first-time users to verify their identity in order to prevent money laundering activities. The upside is that it has become much easier to exchange online currencies for fiat currencies. You can connect your bank account directly onto a cryptocurrency exchange or buy digital assets with your credit card.
A Few Words Before You Go…
Hopefully, you now have a better understanding of when and how cryptocurrencies were invented. Like many other technologies, cryptocurrencies only became possible thanks to the dedicated efforts of a community of developers. The story of cryptocurrencies isn’t over yet, and as the popularity of digital assets grows, we will no doubt witness the formation of many new chapters.