Digital currencies simplify monetary transactions and financial infrastructures. Although the idea has been made widely popular by the crypto boom, digital currencies have been around for longer. In this article, we track its evolution from the earliest attempts through the significant improvements to the current realities. This is a sequential narration of how digital currencies came to be.
Let’s journey through time.
1960s – 1983 — Earliest Digital Currency Attempts
In the 1960s, IBM and American Airlines brainstormed on how to develop the Semi-Automatic Business Research Environment System (SABRE). They came up with a system that revolutionized the airline industry and facilitated the conversion of cash into virtual credit. Although this virtual credit represented the first form of money to be primarily managed, stored, and exchanged on digital computer systems, it was created for a different purpose.
It wasn’t until 1983 that American cryptographer David Chaum conceptualized the idea for the first form of token currency. The token, named eCash, shares striking similarities with the modern-day cryptocurrency. Individuals could transfer ownership among themselves safely and privately as they currently do in many aud to crypto exchange platforms.
While the company Digicash, which he founded to implement his ideas, tanked in 1998, the concepts were implemented by other innovators in the late 90s.
These were the earliest attempts at creating a digital currency.
1996 — Gold-backed Electronic Money
Dr Douglas Jackson and Barry K. Downey modified David Chaum’s ideas in 1996 when they created a private digital currency called e-gold. E-gold was similar to e-cash in that it was purely digital. However, it differed because the transactions were completely irreversible, and the currency was tied to gold ownership.
While these innovators had innocent intentions, certain criminals had other ideas. Money launderers, shady financial investors, and other like-minded folks quickly leveraged the irreversible nature of the transactions for illegal activities. In response, CEO Douglas Jackson acknowledged in a statement that some users were using e-gold for criminal activities and condemned the act.
Ultimately, after a series of legal battles, the U.S. government mandated the company to block several E-gold accounts before indicting it on account of not doing enough to prevent illegal activities.
1997 – Hash Cash
Although it wasn’t built to serve as a digital currency per se, Hash Cash enjoyed significant success compared to most early forms of virtual assets. In 1997, computer scientist Adam Back proposed a Proof of Work (PoW) system for minimizing email spam and preventing DDoS attacks, among other things.
Like many modern cryptocurrencies, Hash Cash used a Proof of Work (PoW) algorithm for generating and distributing new coins. Satoshi Nakamoto’s white paper referenced this algorithm as an inspiration for the mining function in Bitcoin’s distributed ledger.
However, Hash Cash came before its time, as it couldn’t figure out how to solve issues related to processing power needs before it eventually faded before hitting the markets. Bitcoin would later solve some of these problems a decade later. More on that later.
1998 — B-Money, a Decentralized Electronic Money
Developer Wei Dai jumped on the merry-go-round of unsuccessful attempts at creating a digital currency in 1998. This time, he proposed an “anonymous, distributed electronic cash system.” This decentralized electronic currency called B-Money secured transactions and prevented double spending using cryptography.
As such, it represented one of the first digital currencies that required no central authority. Dai’s protocols required a synchronous and unjammable broadcast channel. Although this attempt was ultimately unsuccessful at the time, the ideas remained vital to the evolution of digital currency, as Satoshi Nakamoto also referenced some elements of its design in Bitcoin’s White paper later in 2008.
1998 — Nick Szabo Conceived the Idea of Decentralized Digital Currency
Around the same time as Wei Dai, computer scientist Nick Szabo was working on some of the concepts that could be directly related to the “almighty” Bitcoin’s success. Nick’s concept used blockchain techniques like a peer-to-peer network, cryptography, mining, ledger, and even a decentralized network. It was named Bit Gold.
As its name implies, Nick Szabo designed Bit Gold to share similarities with Gold so that transactions would require no middlemen. However, like its predecessors, Nick’s Bit Gold took a seat at the table of failed attempts.
2008 — Satoshi Nakamoto’s Bitcoin White Paper
In 2008. Lehman Brothers Holdings, the world’s fourth-largest investment bank, had just filed for bankruptcy in September. The world was in the thick of a financial crisis as companies and financial infrastructure crumbled.
Then came the mysterious entity operating under the pseudonym “Satoshi Nakamoto,” with a White Paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” This white paper proposed a decentralized alternative to the crumbling financial system. Instead of a central authority, this idea secured transactions using cryptography and an underlying blockchain technology — a distributed ledger that recorded all transactions made on the network.
It was huge! Its Proof of Work (PoW) algorithm utilized two continuous SHA-256 hashes, which limited the rate of mining as opposed to Hash Cash’s SHA-1 hash.
Having taken the tech world by storm in 2008, Satoshi mined Bitcoin’s “genesis block” in early 2009. They embedded the writing “The Times 03/Jan/2009/Chancellor on brink of second bailout for banks.”
Pretty gutsy for a system no one knew who was behind, don’t you think? Well, for a coin with a current market cap of USD 934.43 billion, some would consider that accurate.
Soon after, in 2009, Satoshi Nakamoto transferred the first Bitcoin to Hal Finney.
Thus began the development of the world’s largest cryptocurrency.
2011 — Alternative Cryptocurrencies, “Altcoins” Diversified the Crypto Market
Despite numerous skepticism and challenges, Bitcoin reached significant milestones in its early days. As a result, it grew in popularity and adoption. Nonetheless, the growing demand and increased adoption revealed some flaws and areas that could be improved upon in its design.
In response, numerous alternative cryptocurrencies emerged to remedy some Bitcoin limitations, improve upon its features, and ultimately diversify the market.
Namecoin, an altcoin designed to serve as a decentralized domain name system (DNS), was one of the earliest attempts in 2011. In the same year, Charlie Lee introduced Litecoin, a digital currency that reduced transaction confirmation times using a different hash algorithm.
A couple of years later, in 2015, Ethereum unveiled the idea of smart contracts, paving the way for decentralized applications (Dapps) and blockchain-based platforms. In the same vein, other altcoins like Ripple, Cardano, Dogecoin, etc., have surfaced to serve as either utility, security, DeFi, Governance, Meme, or Platform tokens.
Digital currencies now have multiple use cases.
Conclusion
Digital currencies are here to stay.
Efforts by early cryptographers like David Chaum, Dr. Douglas Jackson, and Barry K. Downey created the earliest ideas of a digital token currency. Adam Back’s Hash Cash created the blueprints for Bitcoin’s Proof of Work (PoW) mining algorithm. Likewise, Wei Dai and Nick Szabo established companies that created B-Money and Bit Gold, two digital currencies that emphasized decentralization, respectively.
So, when Satoshi Nakamoto put all these and more together in his new design, the amazing Bitcoin emerged in 2008.
Yet, altcoins continued to evolve the idea of digital currencies as Litecoin, Ethereum, and others have shown potential for niche applications and significant improvement over Bitcoin.
This evolution indicates that digital currencies will continue evolving in significance as they revolutionize our daily lives.
