A History of Cryptocurrency: Before Bitcoin and the Pioneers of Digital Currency

The history of cryptocurrency and the attempts to create decentralized digital currency is fascinating.

While Bitcoin is considered the first cryptocurrency, there had been many previous attempts to create digital money. From early experiments in the 1980s to more recent efforts in the 2000s, several pioneers have tried to create a digital currency system that could function independently of traditional banking institutions. While many of these early attempts ultimately failed, they laid the groundwork for the development of modern cryptocurrencies and helped pave the way for the digital currency revolution we are seeing today.

Let’s have a look at the history of cryptocurrency before Bitcoin and some of the first attempts at creating cryptocurrencies.

E-Cash: The First Cryptocurrency (sort of)

Many in the cryptography space consider David Chaum the “father of cryptocurrency”. This is because Chaum was responsible for one of the first attempts to create digital money, which was called E-cash.

E-cash worked by encrypting the digital money so that it could only be accessed by the owner, and it used a third party to mediate transactions to prevent double-spending.

While e-cash was ahead of its time, it faced a number of challenges that prevented it from gaining widespread adoption. One of the biggest issues was that e-cash required a central authority to issue and manage it, which went against the decentralization ideals of many in the cypherpunk movement.

In a 2019 interview with Forbes, Chaum shared his insights on why E-cash was ahead of its time and therefore ultimately didn’t work:

At the time, personal computers were not powerful enough to run nodes, so we worked with banks and corporations to complete transactions.

David Chaum, Inventor of E-Cash (one of the first digital currencies)

Chaum is still actively involved in the cryptocurrency industry, having recently created a privacy-focused and quantum-proof blockchain called the XX Network.

Wei Dai and B-Money

Another early attempt at creating a digital currency was B-money, proposed in an essay by programmer Wei Dai in 1998. Wei envisioned a digital currency that could operate as a medium of exchange in a “crypto-anarchy”.

I am fascinated by Tim May’s crypto-anarchy. Unlike the communities traditionally associated with the word “anarchy”, in a crypto-anarchy the government is not temporarily destroyed but permanently forbidden and permanently unnecessary. It’s a community where the threat of violence is impotent because violence is impossible, and violence is impossible because its participants cannot be linked to their true names or physical locations.

Like Bitcoin, B-money used cryptographic algorithms to generate new units and verify transactions.

While B-Money was never implemented, Wei received recognition from Satoshi himself. Additionally, the smallest denominations of Ethereum are called “Wei” in honor of the B-Money creator.

Nick Szabo and Bit Gold

The cypherpunk movement emerged in the 1990s as a group of computer scientists and privacy advocates who were interested in using cryptography to create a more secure and private internet. Among the cypherpunks was Nick Szabo, who is credited with creating the concept of Bit Gold,

Bit Gold was a concept for a peer-to-peer digital currency, with many of the same characteristics as Bitcoin.

How were Bit Gold and Bitcoin Similar?

The idea for Bit Gold shares many of the characteristics of Bitcoin. For example, like Bitcoin, Bit Gold users had to solve cryptographic puzzles, which were then sent through a Byzantine Fault Tolerant network. The transaction was then stored on a ledger, similar to the Bitcoin blockchain.

Szabo’s Bit Gold was never fully implemented. Szabo did publish a paper outlining how the concept would work and in 2008, just before the publication of the Bitcoin white paper, Szabo posted on his blog that he would test a live version of Bit Gold.

Hashcash

Although not a cryptocurrency, Hashcash was a method designed to prevent email spam by using proof-of-work. The idea for Hashcash was developed by programmer Adam Back in 1997.

The idea behind Hashcash is to require the sender of an email to perform a computationally intensive task before sending the email, which would deter spammers from sending large volumes of unsolicited emails. The sender would include a small token in the header of the email that proves they have performed the required computation.

The computation involves finding a cryptographic hash value that meets certain criteria, such as having a certain number of leading zeros. This process requires a significant amount of computational power and is designed to be difficult to automate for spammers.

The Hashcash system was an early example of using proof-of-work as a way to prevent certain types of internet abuse, and it was an important precursor to the development of cryptocurrencies like Bitcoin, which also use proof-of-work as a way to secure their networks and prevent double-spending.

Before there was Ripple: RipplePay

In 2004, a Canadian programmer called Ryan Fugger launched RipplePay. RipplePay was a payment system that used a web of trust to enable secure and decentralized transactions.

While not a cryptocurrency, RipplePay was an early example of a decentralized payment system that aimed to eliminate intermediaries and provide users with direct control over their financial transactions.

Fugger eventually sold the platform to Jed McCaleb and David Swartz who would eventually develop the platform into the XRPLedger.

Hal Finney and Reusable Proof of Work

Also in 2004, Hal Finney, a cryptographic pioneer, created Reusable Proof of Work (RPOW), a digital currency that used a proof-of-work system to prevent double-spending. RPOW’s proof-of-work algorithm was similar to the one used in Bitcoin, and it provided an early example of how blockchain technology could be used to create secure and decentralized digital currencies.

Hal Finney was also an active participant in the early days of Bitcoin and a key figure in the history of cryptocurrency. In fact, Finney was the first person to receive a transaction from Satoshi Nakamoto. Finney was impressed with Bitcoin, and even estimated that if a fraction of household wealth was invested in the digital currency, the price could eventually be $10 million per coin.

2008: The Birth of Bitcoin

Today, we all know Bitcoin as the first-ever cryptocurrency.

Bitcoin’s innovative blockchain technology allowed for a decentralized, trustless system that eliminated the need for a central authority. Transactions were verified and added to the blockchain by a network of users, and new coins were created through a process called mining. Bitcoin’s decentralization and its ability to provide users with a high degree of anonymity and privacy were key factors in its rapid adoption and success.

Final Thoughts on the History of Cryptocurrency

The history of cryptocurrency is a fascinating one, and the attempts to create a digital currency before Bitcoin demonstrate the long and winding road that led to its creation. eCash, B-Money, Hashcash, and Bit Gold were all important precursors to Bitcoin, but it was Bitcoin’s ability to solve the double-spending problem and provide a trustless, decentralized system that made it the first true cryptocurrency.

Today, Bitcoin and other digital currencies continue to evolve, with Ethereum being the first to incorporate smart contract technology into cryptocurrency. There are now thousands of cryptocurrencies in circulation, many are both useless and ultimately worthless. However, some of the brightest minds continue to work on making blockchain tech more scalable, faster, and easier for the general public to use.