1.2 Precursors to Bitcoin

Section 1.1 (previous) What is Bitcoin

Section 1.3 (next) Who Created Bitcoin

While Bitcoin may have been the first successful cryptocurrency to make a huge impact, it isn’t the first digital currency. In this section, we look at some of the attempts made at creating a digital currency before Bitcoin came along in 2009.

DigiCash

• In 1982, David ChaumDavid Chaum is an American computer scientist and cryptographer known as a pioneer in privacy-preserving technologies and recognised as the inventor of digital cash. Jewish by birth, his 1982 dissertation “Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups” is considered the first known proposal for a blockchain protocol. Complete with the code to implement the protocol, Chaum’s dissertation proposed all but one element of the blockchain later detailed in the Bitcoin whitepaper. Chaum is sometimes affectionally referred to as the Godfather of Crypto. wrote about a new form of electronic cash which involved the use of token currency which could be transferred between users.
• A cryptographer by profession, Chaum developed what was known as a blinding formula to encrypt information passed between users of DigiCash. These are typically the merchant, the customer and the bank.
• The German-based Deutsche Bank was one of the few backing banks that supported the DigiCash system.
• DigiCash tokens could thus be transferred privately and safely by means of encryption.
• The concept of DigiCash was put into practice in 1990 until it went bankrupt in 1998. The DigiCash company was sold for assets in 2002.
• Although the ultimate failure of DigiCash was due to low adoption and utilisation, the hurdles faced by DigiCash were its more centralised nature (reliance on banks for token redemption) and inability to prevent a double-spend.
• In spite of that, the concept, formulas and encryption features of DigiCash would later play a role in the development of other digital currencies after it (as described below).

e-gold

• e-gold was a system of digital currency backed by gold and other precious metals which was founded by oncologist Dr Douglas JacksonDr Douglas Jackson is an American physician, board certified in radiation oncology and received his M.D. from Penn State in 1982. From 1986 to 1992 he served as a Major in the U.S. Army Medical Corps, Chief of Radiation Oncology at the Brooke Army Medical Center, Fort Sam Houston Texas. In 1992 he left active duty to assume duties as Medical Director for Radiation Oncology at Holmes Regional Medical Center in Melbourne, Florida. In 1995, based on a private study regarding monetary influences on credit and the business cycle, he created e-gold as remote payment system that did not require an obligatory financial intermediary. The e-gold system was deployed online in November 1996. In 1998, Dr. Jackson sold his interest in Florida Oncology to devote full-time attention to e-gold. and attorney Barry K DowneyBarry Downey is an American attorney and is a co-founder of the e-gold enterprise where he served as Secretary, Vice-President and Director. Mr Downey is a founding partner of Smith & Downey, P.A., a law firm concentrating in general business, employee benefits/executive compensation, and labour and employment law, which firm served as general counsel to the Company. He was admitted to bar in 1986 (Maryland), in 1989 (District of Columbia), and in 1991 (U.S. Supreme Court). in 1996.
• In 1999, e-gold introduced support for wireless mobile payments after a demonstration of the e-gold Spend via Palm Pilot.
• Launched 2 years before PayPal, e-gold operator Gold & Silver Reserve Inc. (GS&R) starting experiencing massive growth from year 2000 onwards.
• By 2004, over a million user accounts had been registered, which had grown to 5 million accounts by 2009 when transfers were suspended due to legal issues.
• In 2006, during its peak, with a monetary base of US$71 million worth of gold, e-gold was processing yearly transactions exceeding US$2 billion.
• e-gold was then the only successful micropayment system in the world and allowed transactions as small as one ten-thousandth of a gram of gold. At the current gold price of US$50 per gram and BTC price of US$10,000 that would be equivalent to 0.00000050 BTC or 50 satoshi.
• One of the causes of e-gold’s downfall was its massive early success. With a tangible store of value and a large user base, it became a playground for malware and phishing scams as well as an available facility for international Ponzi schemes and money laundering. This was largely due to their lack of identity verification of their users.
• In 2007, e-gold was prosecuted by the U.S. Treasury Department and the U.S. DoJ under the USA Patriot Act for operating as a money transmitter without the appropriate license.
• Although initially filing a motion to dismiss the case based on the reason that e-gold did not fit the definition of a money transmitter, it was ruled against their favour by the court as money transmitting may not be limited only to cash or currency.
• In 2008, after contesting the charges for a year, Dr Jackson pleaded guilty to “operation of an unlicensed money transmitting business” and “conspiracy to engage in money laundering”.
• Although the federal judge on this case ruled that the founders of e-gold “had no intent to commit illegal activity” it was ultimately shut down by the US government.
• The failure of e-gold was due to their inability to provide a system where account user identities could be verified to prevent illegal activities within their user community.

Hashcash

• Prior to the emergence of bitcoin, Hashcash was probably one of the more successful implementations of digital currencies.
• Invented in 1997 by Adam BackAdam Back is a British cryptographer with a computer science Ph.D from University of Exeter, South West England.Back invented Hashcash, a proof-of-work system which has been used in protocols to prevent blog spam and is similar to the one used in Bitcoin. He also implemented credlib, a library used in the credential systems of David Chaum. Back is the CEO of Blockstream, a tech company that endeavours to further the development of bitcoin and blockchain technology, and provides funding for the development of Bitcoin Core., Hashcash was designed to minimise email spams and prevent DDoS attacks, and used a proof-of-work algorithm in the creation of new coins similar to the blockchain and cryptocurrency mining processes of today.
• In 1997, Hashcash encountered an increase in processing power requirement, making it becoming less effective over time. It eventually faded into obscurity.
• Nevertheless, there was a large interest in Hashcash during its time, and it wouldn’t be surprising to find elements of Hashcash adopted into the development of bitcoin.

b-money

• An “anonymous, distributed electronic cash system” known as b-money was proposed and published in a paper by Wei DaiWei Dai is a computer engineer who graduated from the University of Washington. He worked in the Cryptography Research Group at Microsoft Corporation in Redmond, Washington where he was involved in the study, design and implementation of cryptosystems for specialized applications. Prior to joining Microsoft, Dai was a programmer with TerraSciences of Acton, Massachusetts. Dai is a cypherpunk best known as the creator of b-money and the developer of the Crypto++ library, a free and open-source C++ class library of cryptographic algorithms and schemes widely used in academia, student projects, open-source and non-commercial projects, as well as businesses. in 1998. It was never officially launched and remained only as a proposal.
• In the b-money proposal, currency is transferred through a decentralised network using digital pseudonyms.
• The use of proof-of-work function was proposed as a means of creating money, which is similar to bitcoin’s hashcash proof-of-work in the mining process to create new bitcoin.
• In the end, b-money did not get enough attention and was ultimately unsuccessful.
• Features of b-money was referenced in bitcoin’s whitepaper 10 years later, and it is hard to ignore that B-money has had an effect in some ways towards the development of bitcoin.
• In fact, it is claimed that during the development of bitcoin, its founder had reached out to Wei Dai before other developers.

Bit gold

• Bit Gold was the brainchild of Nick SzaboNick Szabo is a computer scientist, legal scholar and cryptographer known for his research in digital contracts and digital currency. He graduated from the University of Washington in 1989 with a degree in computer science and holds an honorary professorship at the Universidad Francisco Marroquín. The phrase and concept of smart contracts (which is a major feature of cryptocurrency) was developed by Szabo with the goal of bringing what he calls the “highly evolved” practices of contract law and practice to the design of electronic commerce protocols between strangers on the Internet. In 2008, prior to the release of bitcoin, Szabo wrote a comment on his blog about the intent of creating a live version of his hypothetical currency. In 2015, a subunit of the Ethereum token was named after him – the Szabo. at around the same time as b-money.
• Bit gold was an electronic currency system with its own proof-of-work that is quite similar to today’s bitcoin mining process.
• The objective of Bit gold was to steer away from being dependent on centralised authorities and for it to emulate the properties of gold, where value can be exchanged between 2 users without reliance on middlemen.
• Bit gold prevents the double-spending problem by using a Byzantine-resilient P2P method which relies on a quorum of network addresses instead of quorum of computing power (hash) and as such is vulnerable to Sybil attacksIn a Sybil attack, the attacker subverts the reputation system of a network service by creating a large number of pseudonymous identities and uses them to gain a disproportionately large influence using entities that do not have a chain of trust linking them to a trusted entity. Sybil attacks are also called sock puppetry..
• Like B-Money, Bit gold was also unsuccessful in the end.

As you understand how bitcoin works in the upcoming chapters, it becomes clear how these precursors to bitcoin had played an important role towards its development and creation. Without these earlier experiments and real-world tests, as well as initial codes and problems faced to work upon, bitcoin may not have been the successful cryptocurrency that it is.

For what it’s worth, Bitcoin learnt from the failures and hurdles of these earlier attempts at digital currencies:

1. DigiCash was not decentralised enough.
   Bitcoin is highly decentralised.
2. DigiCash didn’t solve the problem with double-spending.
   Bitcoin solved the double-spending problem.
3. e-gold did not require ID verification of its users via AMC and KYL.
   All proper platforms trading in bitcoin and cryptocurrencies are AML/KYC compliant today.
4. Bit gold utilised a Byzantine-resilient method that relied on a quorum of network addresses making it vulnerable to Sybil attacks.
   Bitcoin relies on a Byzantine-resilient method that relied on a quorum of computing power to solve this problem.

Most people who hear about Bitcoin for the first time feel that Bitcoin being the first cryptocurrency, may likely fail or be superseded as most firsts often do. They are often not aware that Bitcoin is the polished result of many attempts at digital currencies that came decades before it.

In the next section 1.3 Who Created Bitcoin, we look at the story behind the enigmatic creator of the Bitcoin cryptocurrency.

Section 1.1 (previous) What is Bitcoin

Section 1.3 (next) Who Created Bitcoin