The Bitcoin did not emerge overnight. Over decades, developers have created the foundations for the first crypto asset.
Card payment as the first step
On the way to digital and decentralized means of payment, not only numerous technical problems had to be solved. People also had to be convinced of the benefits of digital means of payment in practice. Like many new developments, cashless payments had to contend with a lot of skepticism at the beginning.
The first functioning systems for cashless, card-based payment processes emerged in the 1980s. An early example of sensible use was provided by some gas station owners in the Netherlands in the 1980s. After numerous robberies, the owners of the gas stations wanted to reduce financial risk as well as personal danger and introduced card payment. Customers accepted the system and were able to make cashless payments at participating service stations from then on. What sounds obvious today was a remarkable step at the time.
“The only thing useful banks have invented in 20 years is the ATM.”
eCash by David Chaum
In 1989, the well-known U.S. computer scientist David Chaum finalized work on a protocol for a digital currency, which he called eCash. The concept used numerous procedures he had developed, including the cryptographic method of "blind signature". This method allows the sender of a message to be verified without disclosing the content it contains and is an important element of well-known cryptoasset protocols.
Despite its technically sophisticated implementation, eCash did not enjoy long-term success. For one thing, the rise of e-commerce had just begun. For another, the protocol too closely resembled the structure of central service providers, as represented today by PayPal. Because of its rigid connection to the existing system of commercial banks, eCash did not represent an independent payment system. However, David Chaum's work was not in vain. The concepts he developed and tested in practice prepared the ground for subsequent developments.
One thing became clear to all proponents of a digital currency by the centralized nature of the eCash system and the resulting problems with regulators at this time at the latest. A robust and independent monetary system must be designed in a decentralized manner.
"Digital payments have become a major tool to promote financial inclusion in the country. In a densely-populated nation like India, it is not possible for banks to be omnipresent."
b-money und bit gold
About ten years after the launch of David Chaum's eCash, Wei Dai, a Chinese hardware developer, conceived the digital money b-Money, which already anticipated many points of Bitcoin. In his paper, for example, Wei Dai described the possibilities of using the computational effort put into solving a mathematical problem as proof-of-work, and compensating the computer involved for that effort. Dai also mentioned the use of a shared accounting system (distributed legder) whose entries are collectively verified and accepted. Although his protocol never got beyond the conceptual stage, it noticeably influenced subsequent developments. In honor of Wei Dai, the smallest unit of ether, the wei, was named after him.
Another important pioneer of digital currencies is Nicholas Szabo, a native of Hungary. In 1998, the computer scientist developed the bit gold protocol, a direct precursor to bitcoin, which already revealed essential building blocks of its successor. The core of the bit gold protocol is the proof of work concept, which Szabo based on the work of Adam Back. The latter had created a corresponding algorithm a year earlier that could be used to avoid spam messages and prevent distributed denial-of-service attacks in networks.
Szabo's contribution to the creation of a decentralized monetary system is extraordinary. Only the double spend problem could not be satisfactorily solved by Szabo with his bit gold protocol. This is the question of how to prevent the same monetary unit from being spent more than once in a payment system. Implementing such a control in a decentralized system without a central settlement unit is a very difficult problem, the solution to which initially remained open.
“Innovation is an inexhaustible engine for economic development.”
With the creation of the Bitcoin protocol, Satoshi Nakamoto combined various building blocks developed by his predecessors. At the same time, by implementing Bitcoin as a blockchain application, he also solved the double spend problem.
October 31, 2008 marks the date of publication of the Bitcoin Whitepaper titled "Bitcoin: A Peer-to-Peer Electronic Cash System". On January 3 of 2009, in the midst of the greatest financial crisis since the 1930s, the Genesis Block was the origin of the Bitcoin blockchain. This block is the first block ever created on the Bitcoin network. Since the reward for creating the block as part of the mining process was 50 bitcoin at the time, the first 50 bitcoin were created at the same time as this first block.
The timing of the network's launch was not chosen at random. The global financial system was facing complete failure at the time. One detail provides a glimpse of Nakamoto's motivations, as he sent a short text message with the creation of the first block of the Bitcoin blockchain. That message is a quote of the headline of a Jan. 3, 2009, article in the British newspaper The Times, which reported on then-finance minister Alistair Darling's plans to prop up British banks with hundreds of billions of British pounds as part of a renewed bailout. The short text read "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks."
For Nakamoto, the Bitcoin network represented an alternative to the existing centralized system as a bank-independent peer-to-peer system for global payments.
"A lot of people automatically dismiss e-currency as a lost cause because of all the companies that failed since the 1990’s. I hope it’s obvious it was only the centrally controlled nature of those systems that doomed them. I think this is the first time we’re trying a decentralized, non-trust-based system."