Blockchain History: Genesis (1980–2009)
It is common knowledge nowadays that Bitcoin and its underlying technology, blockchain, came out to the world in 2008.
But like any other major technology, there were a few necessary milestones that led to this development. In this article, we’ll explore the origins of the blockchain and its first years of life.
Cryptocurrencies may be one of the favourite portfolio assets for millennials, but most would be surprised to know that the first proposal of digital cash came out as early as 1982. In the paper “Blind signatures for untraceable payments”, the researcher David Chaum, University of California, proposed for the first time the idea of digital cash.
He founded Digicash in 1990, but the company went South and filed for bankruptcy. This was the first serious attempt to take digital cash to the real world, although internet adoption was in its infancy at the time.
Further advancement of the technological puzzle came in 1991 when Stuart Haber and W. Scott Stornetta first involved working on a cryptographically secured chain of blocks whereby no one could tamper with timestamps of documents. A year later in 1992, they upgraded their system to incorporate Merkle trees that enhanced efficiency thereby enabling the collection of more documents on a single block.
In 1996 the company Gold & Silver Reserve (G&SR) launched E-Gold, a digital currency backed by physical gold. The company launched two years before Paypal, held a title of gold on behalf of their users and allowed them to exchange E-Gold.
It introduced the concept of immediate settlement, a key theoretical component on the emergence of current smart contracts. It also enabled the surge of the third-party exchange services. It introduced payment over an SSL encrypted connection and API for third-parties to build on it.
Furthermore, even while it was a centralised company, it developed a governance mechanism known as the “e-gold Special Purpose Trust”, the embryo of today’s governance boards.
“E-Gold also allowed the first international ponzi schemes and the globalisation of fraud”.
At its peak, e-gold reached $2 Billion worth of transactions a year, 5 million accounts and over 3.5 metric tonnes of gold in its reserves.
The demise of e-gold came with the increasing security concerns, Ponzi schemes and phishing attacks. The company was continuously targeted by hackers worldwide. Some of the most common hacker techniques (company impersonation, mailing list attacks…) were refined against e-gold targets. E-Gold also allowed the first international Ponzi schemes and the globalisation of fraud.
E-Gold was shut down by American justice on the grounds of being an illegal money transmitter. During the prosecution process, e-gold lost a big user base, scared of seeing their holding seized by the authorities. By 2008 the system was on freefall.
There were other innovations in the meantime. In 1997, Adam Back proposed the concept of Hashcash as a way of suppressing email spamming. HashCash works by requiring a modest amount of computational power to be used in order to achieve a task. Technically is a cryptographic hash-based proof-of-work algorithm that can be verified efficiently.
Hashcash uses the SHA-1 hash and requires the first 20 of 160 hash bits to be zero, current bitcoin’s proof of work uses two successive SHA-256 hashes and currently requires first 74 of 256 hash bits must be zero, as of 2019.
Also in 1997, cryptographer Nick Szabo published a paper called “Formalizing and Securing Relationships on Public Networks” where he proposes the concept of smart contracts, a way of executing agreements between strangers in a trustless network.
In 1998, Szabo designed a decentralised digital currency called Bit Gold. Szabo proposed that the users use computational power to solve cryptographic puzzles.
Bit Gold never saw the light, but its theoretical framework influenced the creation of the first cryptocurrency.
Also in 1998, computer engineer Wei Dai published “B-money, an anonymous, distributed electronic cash system.” This paper describes many of the characteristics of modern-day cryptocurrencies, like collective update of a ledger, incentivised working process, authentication with cryptographic hashes or public key cryptography.
Another important contributor was developer and cryptographic activist Hal Finney, who in 2004 developed the first reusable proof of work (RPOW).
There were a few clues that something was coming to the world. Something big.
On August 2008, the web domain “bitcoin.org” was registered.
On 31 October 2008, a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” was published on a cryptography mailing list by Satoshi Nakamoto, a pseudonym identity of a person or persons unknown.
Here’s the original message:
“I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.
The paper is available at: http://www.bitcoin.org/bitcoin.pdf
The main properties:
Double-spending is prevented with a peer-to-peer network.
No mint or other trusted parties.
Participants can be anonymous.
New coins are made from Hashcash style proof-of-work.
The proof-of-work for new coin generation also powers the network to prevent double-spending.” — Satoshi Nakamoto
In January 2009, Nakamoto released the open source software of bitcoin. On 3 January 2009, the bitcoin network was created when Nakamoto mined the first block of the chain, later known as the genesis block.
Embedded in the coinbase of this block was the following text: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” The bitcoin community and crypto-anarchists interpreted as both a timestamp and a comment on the instability caused by fractional-reserve banking.
Six days later, Bitcoin version 0.1 is released. Anyone can participate from this point onward. It was released as a program for Windows, compiled using Visual Studio.
The first bitcoin transaction was sent to Hal Finney on 12 January 2009, when Nakamoto sent him 10 bitcoins on block 170. Eight years later, those 10 free bitcoins reached $200,000 at all-time-high prices.
During 2009, the small cryptographic community carried on mining and debating.
In June, the Chinese government released the first piece of legislation about “virtual currencies”, prohibiting its citizens to trade any kind of digital currency for goods and services. This rule was targeting video game money and digital credit money, such as the QQ Coins launched by Tencent, but it also covered bitcoin.
By 5 October 2009, an exchange rate is established for the first time.
The proposed rate was 1,309.03 BTC = $1 USD. It was generated through an equation that calculated the cost of electricity for one computer to generate Bitcoin. It will take almost 8 years to see this exchange rate turned around: by April 2017, 1 Bitcoin = 1,309 US Dollars.
On 12 October an IRC channel is created for Bitcoin Development: #bitcoin-dev. As a result of this channel Bitcoin version 0.2 is released two months later, on December 16th.
On the 22nd of November 2009, Satoshi Nakamoto created the forum Bitcointalk, using ‘satoshi’ as his username. He moved the main threads from the previous Sourceforge forum.
We end this year with an increase in difficulty for mining Bitcoin. On December 30th, just before the New Year starts, the mining difficulty is increased for the first time in history.
This is it for now. In our next article, we’ll explore the evolution of the bitcoin community, the surge of altcoins and the creation of the first marketplaces.
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