’82 | The Birth Of Digital Cash
Lovely to see you here at blockwhat?, still looking good and fresh! Ready to continue our hike up Mount Blockchain?
This story revolves around the highly influential cryptographer David Chaum and his dream of creating a digital currency that protects the privacy of its users — eCash. A fascinating story about the founding father of the digital currency revolution.
This article is part two of our journey. If you’re new here and want to understand what’s going on, just click here.
- 3000 BC | Hiking Up Mount Blockchain
- ’82 | The Birth Of Digital Cash (This article)
- ’96 | Oncologist + Gold = Revolution?
- ’97 | Anybody interested in some hash(cash)?
- ’98 | Wei Dai — Who dat?
- ’98 | Make It Rain (Bit) Gold!
- ’03 | It’s Karma
- ’04 | Use me baby, one more time
- ’08 | Bit what? Bitcoin! — Hello world.
- ’13 | Ethereum — The World Computer
While we get started, let me tell you a story and take you way back into the early ’80s, to a time when sweet dreams were made of people sporting fashionable hair styles, walking down the street fabulously dressed, partying it up with their boomboxes (this is one of the most intense commercials I have ever seen!).
They were easier times.
Our story today revolves around a fascinating man, for whom safeguarding the privacy of us all has always been at the core of his convictions and in most of the things he did and continues to do. As it happens to be, he is also the guy who for the first time in history presented a sound vision for a digital currency. Oh, and he laid the essential groundwork for anonymous communications research (think TOR). Pretty dope in its own respect.
This man is David Chaum.
All throughout his career, there was one crucial aspect around which his work, his thoughts and his life revolved. Privacy.
His outstanding deductive and reasoning skills have enabled him to see what was waiting for all of us at behind the horizon of the digital revolution that was gaining speed and traction. He understood early that the extension of our analogue physical life into the electronic digital realms bears many highly problematic and scary outcomes. Just let his own words sink in, that were concerning the digital panopticon that was waiting to spread its all encompassing wings around the planet:
“Current developments in applying technology are rendering hollow both the remaining safeguards on privacy and the right to access and correct personal data. If these developments continue, their enormous surveillance potential will leave individuals’ lives vulnerable to an unprecedented concentration of scrutiny and authority.” — David Chaum 1991
At a time when many hailed the future laying ahead as the time of a more radical vision of individual freedom and expression, he managed to also point out the dangerous sides to this.
He wrote in an article in 1992, that “in one direction lies unprecedented scrutiny and control of people’s lives; in the other, secure parity between individuals and organizations. The shape of society in the next century may depend on which approach predominates.”
But lets go back to where it all started. Fueled by his conviction to create cryptographic technology that liberates individuals from the spooky shadows of those who gather digital profiles, he published his groundbreaking research paper “Blind Signatures” in 1982.
I’ll briefly explain the way these blind signatures work, for a more in-depth explanation just click here.
The fundamental building block of this new concept is so called public key encryption.
If you want to deep-dive into this fascinating technological marvel, check out this comprehensive guide:
Otherwise here is a brief overview how this works.
We start by taking a random string of numbers (e.g. 3860280357), from now on this will be called our private key) and mathematically derive another string of numbers from it — the resulting new string of numbers is called public key. A very important aspect of this process is, that it’s a so called one way function, which means that it’s very easy to calculate it into one direction (ergo from private key to public key), but not the other way around (aka it’s almost impossible to derive the private key from the public key)! The main take away that you need to remember and understand right now, is that these two keys share an intimate relation and are linked to each other.
This very abstract sounding concept enables us to do some marvelous things though, because we can now take a piece of data, use our public key and scramble it up (by using some encryption magic). For everybody out there this new data set is incomprehensible and unreadable. In order to unscramble it and to make it readable, one need to be in possession of the corresponding private key. Whoever has that key, can now use some mathematical magic and unscramble the data. Voila!
An easy to grasp analogy for this can be found in these lock boxes for keys, that are quite commonly used by AirBnb hosts, maybe you’ve seen one of them already yourself. You have a key that you hide inside, the box is then deposited in the public and can be seen by anyone, aka a public key. But nobody can open it, unless they have the corresponding password, aka a private key.
A really cool thing you can do with this concept is to digitally sign a document. We just repeat the same steps as explained above, but this time we change the keys we use:
- We take a document that we want to sign, add our private key and scramble it.
- The result is a new string of numbers. Now, everybody who is interested in checking that it was really us signing the document can simply check it, using our public key.
- Easy as that.
Based upon this cool property of public key encryption, David Chaum took this idea even further. He proposed adding a random number (note, not your public key!) to the data that you want to have signed. You then send this scrambled data to your friend Alice, who has no idea what the original data looks like. Because she has no idea what she is signing with her private key, she is signing it blindly (= blind signature). An interesting attribute of this is that now her signature is also linked to the original, unscrambled data.
But why would anybody with a sane mind want to sign something without knowing what’s inside? Good question, but hold on to it for a moment, we’ll get back to this very soon!
Hmm.
Wasn’t this article supposed to be about digital money? You’ve read you way through 1.119 words and still nothing about that?
Well, let’s change that.
Things really got rolling in the 90’s. While “real” money was already digital in a lot of cases (think inter bank and government transactions), a revolution was underway to digitize the final mile.
The advent of digital money was inevitable and people started to realize that. Just take this quote from a paper released by the Department of Energy’s Sandia National Labs in Albuquerque, New Mexico:
“The advent of high-quality color copiers threatens the security of paper money. The demands of guarding it make paper money expensive. The hassles of handling it (such as vending machines) make paper money undesirable. The use of credit cards and ATM cards is becoming increasingly popular, but those systems lack adequate privacy or security against fraud, resulting in a demand for efficient electronic-money systems to prevent fraud and also to protect user privacy.”
While the need for digital money was evident, there had been a big looming problem — digital files are easily reduplicatable. That lack of digital scarcity (pun intended) actually has and continues to be a big issue in many areas, but this aspect is worth another individual article some day!
And now there was a potential solution to this.
David Chaum enters center stage with his company DigiCash, which was founded in 1990. At first they were only focused on so called smart cards, with which they established electronic payment systems for toll collection, printer usage, etc.
The really revolutionary thing they gave birth to though was something very different. In 1993, eCash was born and came upon the world.
It’s very important to keep in mind that the main thing Chaum wanted to achieve and to ensure was to keep digital traces of your payment as small as possible, therefore ensuring an individual’s privacy.
Let me explain to you how their ingenious idea played out. Pay attention, now the ominous blind signatures explained above come into play.
In order to explain this thoroughly, let us imagine a fictional little city named Fabulous Town. Since you just madly love that small town charm, you moved to this little place in the middle of nowhere, a calm and tranquil place with only nine other inhabitants. The local bank, Unicorn Bank, just enthusiastically announced their participation in the eCash network and the nine other people in Fabulous Town, who got started using it right away, are raving about it.
You are thrilled about this and download the eCash software to your computer. Let’s assume you want to start small and get started with 100 digital dollars (dd). The newly downloaded program now creates 100 dd, which are basically unique strings of numbers (aka serial numbers). These 100 dd are now scrambled by your computer program by adding a random number to it.
Now they are sent to Unicorn Bank, which signs them blindly, without knowing which serial number they have. For each signed digital dollar bill, the bank subtracts one “real / analogue” dollar bill from your account.
Once this process has been completed, they are sent back to your computer, where they are now stored (no worries, in case of a pc failure, they are easily recoverable). Now, with a simple mouse click, you can use these digital dollars to finally buy this fancy inflatable unicorn below from the local shop focused on everything you need for your perfect lake day, FunTimes Ltd..
After FunTimes Ltd. has received the 42 dd from you, their software checks with Unicorn Bank to see if they have been indeed signed by Unicorn Bank. Unicorn Bank can easily confirm this, since their blind signature is linked to the original, unscrambled data, that your computer has generated earlier. They also quickly verify that the serial numbers have not been used before.
Since Unicorn Bank can’t know who of the ten inhabitants of Fabulous Town originally sent them these specific digital dollars (aka the serial numbers), because they were scrambled, your privacy is ensured.
And thus, digital money was born. Fascinating, isn’t it?
Well, many banks in the real world thought so too, and DigiCash quickly found some big name partners to test their eCash in the wild. The partnered with the Mark Twain Bank in St. Louis in 1995, with Deutsche Bank in 1996 and many others followed suit soon after.
But there was a problem creeping up on DigiCash, and it was homemade. David Chaum turned down a lot of very promising deals and their system couldn’t get enough traction. For example, Bill Gates wanted to incorporate eCash in every copy of Windows 95 — that could have been a mind blowingly important milestone in the adoption of their system. But it turned out that the 2$ per sold Windows copy that David Chaum demanded were way too much for the taste of Bill Gates and he finally took back his offer.
Another big problem that eCash had was the famous chicken & egg dilemma. There weren’t enough shops who supported their system and because of that lack of opportunities to use eCash, not a lot of new users were attracted to use it.
In the end it was a plethora of problems that lead to the eventual demise of DigiCash and their revolutionary eCash. Eventually they had to declare bankruptcy in 1998.
Nevertheless, eCash constituted a major milestone in the history of digital money. With privacy at its core, it set the stage for a lot of innovation and research in the coming decades. It’s interesting to point out though, that from a decentralization aspect (we’ll go into that why this is so important in a later article) there were still major issues, since DigiCash was indispensable as an intermediary that ensured the validity of each digital signature.
If you want to read more about the fascinating DigiCash and eCash story you can find some interesting links at the bottom of this article.
Let me finish here with a quote by David Chaum that sums up his frustration and is more relevant than ever nowadays:
“As the Web grew, the average level of sophistication of users dropped. It was hard to explain the importance of privacy to them.”
I really hope you’ve enjoyed the lecture of this article and that you go away feeling somewhat smarter — this was part one of the history that predates the whole blockchain fuss. As always, please feel free to comment, let me know what you think and if you have any questions, bring them on!
Greetings from Tunis and until soon
Till
PS: if you’re looking for helpful and great resources to learn more about blockchain’s paradigm shifting technological potential, check out these awesome resources.
