The emergence of digital assets, such as bitcoin, signals a fundamental change in the way value is transferred globally.
The concepts of money and value transfer have been evolving since primitive societies adopted shells and stones for monetary exchange, but the concept of digital money has been sought after for as long as there’s been an internet and peer-to-peer networking capabilities to drive its development.
Digital Cash Today
When people say “money” and they’re referring to a medium of exchange, they usually mean conventional banknotes and bank balances. Records of these are kept secure by financial institutions — first as paper, now as digital records.
Today, for the most part, making payments is mostly facilitated by intermediaries, like banks, making accurate and secure changes to those records. So, as financial records became digital, new ways to store and exchange value have been able to emerge.
Today, there are plenty of payment methods and stores of value that are exclusively digital. For example, services like Paytm® and M-Pesa® enable mobile payments for millions of merchants and consumers in many Asian and African countries.
Different systems and processes for transacting with traditional fiat currencies in a digital manner are widely used–including PayPal®, Venmo®, and messaging applications like WeChat Pay®.
These tools do not upend the need for centralized financial institutions to ‘agree’ to transaction records among all parties in a given exchange of value. Indeed, these applications serve as innovative front-end user interfaces built on top of the traditional banking and payment systems, which largely work by translating manual record keeping into an electronic format.
Bitcoin and Other Digital Assets Are Different
Digital assets are poised to become accepted as investable assets and stores of value, tradable on global, licensed exchanges, and accessible to individuals and institutions around the world. This global decentralized framework relies on — and is powered by — distributed ledgers that eliminate the need for central intermediaries to facilitate the value exchange.
Bitcoin is the breakthrough asset of this type, and many more cryptocurrencies have emerged in its wake. But a long history of innovation and experimentation preceded it and made it possible.
A Look Back at Digital Cash
A few notable prior projects:
- DigiCash (1989): by David Chaum was a form of centralized “electronic money” that deployed the same kinds of cryptographic protocols — public key cryptography — that support the untraceable (but verifiable) nature of bitcoin transactions. It is often called “Chaumian eCash.”
- Hashcash (1997): by Adam Back was initially conceived as a mechanism to limit email spam by forcing email senders to solve computational puzzles, it never saw widespread use as either a spam protection mechanism and despite the name hashcash, was never a financial instrument. Bitcoin re-purposed these proof-of-work (PoW) puzzles to become the basis of bitcoin mining.
- B-money proposal (1998): by Wei Dai explored how to create anonymous, distributed systems in which money was created by the Hashcash PoW algorithm.
- The Bit Gold proposal (1998): by Nick Szabo outlined an algorithmic approach for posting transactions containing PoW to servers which must agree to these transaction. This same ‘consensus model’ is now built into the Bitcoin blockchain.
- Re-usable Proofs of Work (RPOW) (2004): by Hal Finney was an attempt to make Proofs of Work into exchangeable tokens. Hal Finney later became the first person to receive a Bitcoin transaction from the creator Satoshi Nakamoto.
Early projects had limitations and challenges that the Bitcoin community and its earliest developers learned from, improved on, and overcame. The breadth, power, and global scale of the Bitcoin network–which are key to Bitcoin’s expanding use and adoption–would not have been possible in earlier eras of the internet and without these breakthroughs in cryptography and decentralized networking.
Unlike fiat currencies (or yesterday’s centralized DigiCash coins), no central entity oversees the Bitcoin network — allowing it to be a ‘decentralized’ digital asset.
And unlike fiat currencies, Bitcoin’s supply schedule and monetary policies are fixed; once the cap of 21 million bitcoin is mined, no more can be created.
Some of these qualities are not exclusive to bitcoin among this new class of digital currencies: later digital asset projects have adopted and iterated on the Bitcoin model — such as by looking beyond proof-of-work protocols and mining to other ways cryptographic assets can be minted, moved, or managed.
As developers flock to the space and the ecosystem grows, the efforts of many innovators are converging to accelerate opportunities and applications for these assets.
The Evolution of Digital Cash
While researchers at MIT’s Digital Currency Initiative tackle some of the technological challenges, digital money — in forms both fiat and crypto — is already changing the way people interact and transact.
Money has been going digital ever since we’ve had an internet to use it on — and many view the Bitcoin network as the world’s “Internet of Money.” As more people learn about these new protocols, new ways to store and exchange value may speed into our lives much quicker than we think.
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