What is a cryptocurrency? A cryptocurrency is more than just an electronic or digital form of money that uses cryptography to secure transactions. For something to be a full-fledged cryptocurrency, it must satisfy the following four conditions. Note that Bitcoin, created in 2008, was the first cryptocurrency to satisfy these conditions.
- It must be self-contained, not requiring recourse to some other already existing currency;
- It must allow people to use the cryptocurrency with nothing more than a public and private cryptographic key;
- It must have a mechanism for controlling the proliferation of the currency; and
- It must function without a third party being able to deny transactions for reasons extrinsic to the transaction protocol.
The first point about a cryptocurrency being self-contained instantly separates it from the ecash and digital forms of money that predated Bitcoin. Essentially, all the precursors to Bitcoin were payment schemes denominated in a conventional currency (such as U.S. dollars). Payments would be transmitted using cryptographic protocols, perhaps with tokens, but in the end they always had to be unpacked in terms of the conventional currency.
The only exception prior to Bitcoin was Bit Gold, which typically is written uncapitalized as “bit gold.” Invented by computer scientist Nick Szabo in 1998, ten years before the release of Bitcoin, bit gold limited the proliferation of its currency by, like Bitcoin, requiring computational puzzles using hash functions to be solved in order for currency to be created.
Bit gold was a proof-of-work system, and it drew inspiration from Hashcash, which had been developed in 1992. Perhaps misnamed, Hashcash was never actually a currency or cash but rather a way of compelling internet users to prove that they had done some computational work in order for an electronic communication (such as an email) to get through to an intended user. Without this proof of work, the communication would be automatically ignored. Hashcash’s aim was to control against spam and denial of service attacks by imposing a computational cost on each email or attempt to gain user attention.
In creating bit gold, Szabo repurposed Hashcash’s proof-of-work system to deliver a form of digital cash. Bit gold’s approach to proof of work using hash functions became a key component of Bitcoin. But bit gold lacked the immutable decentralized ledger of blockchain and depended on one computational puzzle to be solved before the next could be solved, rendering it unwieldy. Bit gold was never implemented, but it proved a fruitful conceptual link in the evolution of cryptocurrency — so much so that its inventor Nick Szabo is to this day regarded as the best candidate for the pseudonymous Bitcoin founder Satoshi Nakamoto (despite Szabo’s persistent denials that he is Satoshi).
Compared to bit gold, other precursors to Bitcoin looked a lot less like what we’ve come to expect and know of cryptocurrencies. Back in the 1980s and 1990s smart cards were often used to handle financial transactions. Once the Web really started to take off in the mid 1990s, many worried that credit card transactions over the Web would be too insecure to rule out massive fraud. This led to proposals such as David Chaum‘s DigiCash, which offered greater security than giving one’s credit card over the Web. DigiCash ended up going bankrupt in 1998, but Chaum did introduce a memorable idea with it, namely, the use of blind signatures to maintain anonymity by rendering payments untraceable.
One of the most successful digital payment schemes was developed the year DigiCash went bust: PayPal. With the rise of the smartphone, conducting financial transactions digitally has become ever easier, as we see with services like Venmo (a PayPal subsidiary) and Zelle (owned by some of our big banks such as Bank of America and Wells Fargo). But in the end, conventional money running through a central source must be used to make these systems work. Conventional money needs be front-loaded or guaranteed via a promissory note to ensure that adequate funds are in place, which can then be securely transferred, perhaps via digital tokens, to complete the transaction.
The visionaries responsible for cryptocurrency as we know it today, however, didn’t just want a quick and easy scheme for moving conventional money around electronically. They were cypherpunks, who wanted to use cryptography to ensure privacy, especially in remaining free of government and corporate surveillance. Moreover, they distrusted conventional fiat currency and were looking for an alternative to it, one that was fully decentralized. David Chaum was a key player in this movement, and his idea of blind signatures was designed to ensure anonymity and privacy.
But anonymity in Chaum’s DigiCash applied to buyers, not sellers. Blind signatures were used to keep otherwise trusted third parties (such as banks) in the dark about buyers’ identities. Blind signatures gave buyers anonymity by getting banks to digitally sign and thereby authorize transfers of money, but because the signatures were blind, transactions involving DigiCash would be untraceable back to the buyer.
DigiCash, in giving banks and established financial institutions the authority to transfer money through blind signatures, centralized its digital currency. In the evolution of cryptocurrencies, however, the move was to eliminate such centralized trusted third parties. Blind digital signatures have therefore assumed a peripheral role in today’s blockchain-based cryptocurrencies, though digital signatures as such have remained central. As it is, blind signatures remain of interest to this day in election security (where election workers are able to use blind signatures to authorize voter ballots, thereby ensuring that the election workers don’t see who the voters are voting for).
Before 2008, when the pseudonymous Satoshi Nakamoto published his white paper on Bitcoin, all the digital money schemes that had been proposed either fell flat or merely expanded the transactional range of conventional currency (fiat money). But the cypherpunks always aimed higher than merely making conventional fiat currency more digitally tractable. So what finally happened in 2008 that made Bitcoin the revolution in money that it is?
It’s not that Satoshi invented anything fundamentally new in cryptography or computer science. Rather, it’s that he took items off the shelf and put them together in a novel way to create in Bitcoin a decentralized self-contained cryptocurrency. Satoshi’s white paper lays out there all the key elements that Bitcoin, and its many successors, use: digital signatures, hashing, peer-to-peer networks, and blockchain. proof of work/stake, and mining (i.e., controlled ways of generating more of the cryptocurrency. All cryptocurrencies that have succeeded Bitcoin, from Ethereum to Solana, exhibit these elements.
Satoshi Nakamoto, whoever he is, did not invent any fundamentally new concept of computer science or cryptography. Nonetheless, in creatively putting together existing concepts from these fields and thereby creating the first full-fledged cryptocurrency, one that to this day dominates the crypto world (Bitcoin), his influence is enormous.