THE.ORIGIN.OF.DIGITAL.CRYPTOCURRENCIES.IN.A.NUTSHELL
Before being exposed to the tech-savvy aspects of bitcoin and blockchain. It is a must to understand the bigger picture of the decentralized monetary system, and its origin. Therefore, this article will give a brief overview about the roots of digital decentralized monetary networks, and which circumstances led to the development of the bitcoin network.
Back to the 80s & 90s
Since the mid-2010s, the mainstream media found their way to the subject of cryptocurrencies. Still, the media coverage cycles between a few predictable topics such as, the radical price fluctuation and the environmental impact. When bitcoin, Ethereum, and especially meme-coins reach all-time highs -or rapid downfalls, we witness how traditional outlets do their best to cover the market conditions. Yet, bitcoin mostly steals the show during these brief moments of mainstream media fame. This in itself isn’t the issue, the issue is rather more nuanced on how media outlets portray bitcoin as a new monetary technology, which is only partially true.
Bitcoin’s whitepaper was published in October 2008 and due to its wild success, we assume that Satoshi Nakamoto is the godfather of the decentralized monetary railroads, used by millions today. Yet, the origin of digital monetary railroads can be traced back to the early 80s.[7]
Probably one of the most influential people in the field of cryptography and decentralized infrastructure, is Dr. David Chaum.[9] In 1983 Chaum published a paper, stating his views on a digital cash (DigiCash) system operating through cryptographic blind signatures. Introducing blind signatures meant that transactions were untraceable, just as cash transactions, and therefore, safeguarding the consumers’ privacy.[7] Chaum would target private banks to issue the digital currency to their clientele, who in turn could perform digital and private transactions.
Not only was Chaum way ahead of his time and peers, his work was the foundation of the Cypherpunk movement, active in the 90s. Writing about the Cypherpunk movement can easily be a standalone article, and therefore, we won’t further explore the topic . Yet, we can’t forget the immense contributions of the Cypherpunk movement. Their futuristic and libertarian way of thinking was, just as Chaum’s, way ahead of its time, and formed the foundation of our current decentralized railways.
Chaum would transform his DigiCash idea into a business in 1989, with commercial banks as its main consumer. Banks showed interest in Chaum’s digital payment system, but due to the early days of the internet, and lack of mass adoption. DigiCash had a difficult time expanding their user base, both merchants willing to accept the payments and consumers willing to use the digital currency. Therefore, the company declared bankruptcy in 1998, and was acquired by the company eCash Technologies, a similar company also working on digital payment systems.[7]
The story of Chaum is just a fraction of an era where the liberalization of the World Wide Web acted as the catalyst of radical innovation, leading to Web 1.0. The main take-away of this section is to understand that the idea of digital anonymous and in some cases decentralized currencies were already present. Hereby, we can move on to the next question: why did the breakthrough of digital decentralized monetary systems take so long?
2000s Financial Crises
The dot-com era (1990–2000s) was the start of the global information highway, leading to countless new companies, business models, and financial evaluations (i.e., clicks, eye balls, etc.). Due to the success of Netscape and Yahoo’s public valuation, other internet related companies took the leap to go public and raise staggering IPOs. Just as most tech businesses today, these companies operated with negative cash-flows, and were therefore dependent on growth of their network (i.e., user base). This growth (or hype) would then funnel new funding from both venture capitalists (VCs) and retail investors, keeping its balance afloat. Yet, a decade of upside came to an end in 2000.[2] [3]
When the dot-com bubble burst, most people lost faith in the future of the internet. The markets collapsed and a majority of the companies labeled “innovative” at the time went bankrupt and those that survived suffered immense losses. Therefore, during the early 2000s, millions of retail investors and VCs experienced staggering losses. In retrospect, we know that this was destined to happen, and the crash ultimately made the market more mature. Yet, the dot-com crash was only a minor blimp compared to the 2008 housing crisis, which caused global turmoil.
It is no secret that for numerous decades, the United States is known for outsourcing its production and services overseas. Therefore, we may assume that the development of financial crises can be seen as one of their ‘services’ still manufactured in-house. Cheap credit, rigged credit scores, and greed caused millions around the globe to lose their house, investment portfolios, and savings. It would cause a wave of monetary chaos that drove banks out of business and ignited government bail-outs. No country was spared from this disaster caused by the mismanagement of several centralized actors.[8]
Still in the mits of the 2007–2008 down trend, the second-largest global currency, the euro — caused turmoil to the European markets. The crisis started in 2008 when Iceland’s banking system went under, due to three of its major private banks collapsing (linked to the U.S. crisis).[6] Unfortunately it didn’t take long before other European countries found themselves in troubling waters. Both the influence of the U.S. housing crisis, and European countries being unable to pay their government debt — plunged EU member states such as Greece, Portugal, and Spain down a debt spiral.[5]
I can still remember footage of Greek citizens standing in line at ATMs to withdraw a single €50 bill, and withdrawals capped by the banks to prevent a bank run. Yet, most citizens didn’t even get the chance to withdraw a single bill, due to ATMs running out of cash. Only after the intervention of the European Commission, the European Central Bank, and the International Monetary Fund did the affected countries stabilize, and would the long road of recovery be initiated.[5] The crisis showed us the weakness of the euro. When one member falls, the threat is real for all other members. The mentality of ‘one for all and all for one’ shows trust and strength to its members pegged to the euro, yet its vulnerability can’t be discarded.
Although both the housing crisis and the eurocrisis seem like relics of the past, we should not downplay their influence on the development of new monetary networks. It was the financial crash of 2008 that caused Satoshi Nakamoto to develop the bitcoin protocol, and its compelling whitepaper.
Bitcoin’s Origin
2008 was an exciting year for the financial world. First, the housing U.S. crisis, then shortly after the eurocrisis, and third, the birth of the largest decentralized monetary network in existence. The anonymous founder, Satoshi Nakamoto had enough of the ongoing monetary failures, and therefore, developed a new and fair monetary network. Satoshi took inspiration from its predecessors, and combined both Chaum’s DigiCash and the Cypherpunks’ vision to develop the first successful decentralized digital asset.
It is no secret how Satoshi adopted elements from its predecessors, and technologies that already proved their worth. For example, leveraging peer-to-peer (p2p) technology, which due to its open-source nature, is decentralized and (almost) impossible to stop. This was proven during the late 90s and early 2000s, when p2p services such as Napster and LimeWire offered a new way to share information, and mostly copyrighted content (e.g. music, film and software).[1]
Still, Satoshi didn’t merely copy the ideas of its forerunners. One element that made it stand out was the implementation of blockchain technology. Just as Chaum’s DigiCash, the idea of an immutable chain of data blocks was mooted in the early 90s by Stuart Harber and Scot Stornetta.[4] As a result of the design choice to use blockchain as the main framework of the network. Satoshi ensured that the bitcoin network would be fraud-proof, and because of its decentralized nature, he ensured that anyone could conduct transactions, and maintain the network by verifying transactions, called “mining blocks” in exchange for bitcoin.[10]
It is interesting how conditions in the late 2000s provided an incentive for innovators like Satoshi to develop a decentralized monetary system, controlled by no single entity, and inflation-proofed by its hard capping of the supply — released over more than 100 years. His decision to slowly release new bitcoins in circulation by halving the mining rewards every four years, prevents individual entities from taking control of the network. While this is yet to be proven, it is safe to say that most of the bitcoin supply is already in circulation, and no single entity owns the majority of the supply.
Satoshi built a network that fit the narrative of his time, and still fits the narrative we live in today. The pandemic severely damaged our economic ecosystem, and caused a staggering depth cycle. Proponents of bitcoin or other decentralized assets are therefore optimistic about the increasing adoption of decentralized networks as a possible solution. If bitcoin or other crypto assets can help us navigate through this storm is still unknown. Yet one thing is clear: a fiat-driven economy will always be tempted to borrow from its infinite resources.
Conclusion
Bitcoin was introduced as a response to the status quo financial system. Instead of centralized institutions controlling our monetary policy, decentralized finance (DeFi), such as bitcoin, offers a new perspective on the current financial system. What started as a radical idea grew into a trillion dollar network, controlled by no single entity, and open for anyone to trade freely.
I hope this article has given you a brief introduction to how and why bitcoin was developed by Satoshi. In some sections we went off track, and you may not have fully understood every part. But don’t worry, it takes time, and at some point it just clicks. For more information, see the sources in the footnotes — or use Google, and get lost down the rabbit hole.
Sources
[1] Goel, Sanjay, Paul Miesing, and Uday Chandra. “The Impact of Illegal Peer-to-Peer File Sharing on the Media Industry.” California Management Review 52, no. 3 (2010): 6–33. https://doi.org/10.1525/cmr.2010.52.3.6.
[2] Goodnight, G. Thomas, and Sandy Green. “Rhetoric, Risk, and Markets: The Dot-Com Bubble.” Quarterly Journal of Speech 96, no. 2 (2010): 115–40. https://doi.org/10.1080/00335631003796669.
[3] Hayes, Adam, and Patrice Williams. “Dotcom Bubble.” Web log. Investopedia (blog), June 25, 2019. Dotcom Bubble.
[4] “History Of Blockchain Technology: A Detailed Guide.” 101 Blockchains (blog), November 3, 2020. History Of Blockchain Technology: A Detailed Guide.
[5] Kenton, Will, Anthony Battle, and Katrina Munichiello. “European Sovereign Debt Crisis.” Web log. Investopedia (blog), October 28, 2021. https://www.investopedia.com/terms/e/european-sovereign-debt-crisis.asp#citation-1.
[6] Kvalnes, Øyvind, and Salvör Nordal. “Normalization of Questionable Behavior: An Ethical Root of the Financial Crisis in Iceland.” Journal of Business Ethics 159, no. 3 (2018): 761–75. https://doi.org/10.1007/s10551-018-3803-8.
[7] Shrivastva, Nikhil, Suman Devi, and Jitendra Kumar Verma. “Digital Money: The Empowering New Currency.” 2020 International Conference on Computational Performance Evaluation (ComPE), 2020.https://doi.org/10.1109/compe49325.2020.9200036.
[8] Singh, Manoj, and Maguerita Cheng. “https://www.investopedia.com/Articles/Economics/09/Financial-Crisis-Review.asp.” Web log. Investopedia (blog), November 27, 2021. https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp.
[9] Vigna, Paul, and Michael Casey. The Age of Cryptocurrency: How Bitcoin and the Blockchain Are Challenging the Global Economic Order. New York: Picador, 2016.
[10] Numerous transactions are combined into blocks and mined (verified) through the verifiers (miners) of the network. If this seems abstract, don’t worry it is normal to not immediately grasp the underlying mechanics. A good source to start is the Bitcoin Standard by Saifedean Ammous. I am currently working on an article to address the basic underlying mechanics.
