History of Cryptocurrency
(Excerpt taken from "Money Crashers: What is Cryptocurrency")
Cryptocurrency existed as a theoretical construct long before the first digital alternative currencies debuted. Early cryptocurrency proponents shared the goal of applying cutting-edge mathematical and computer science principles to solve what they perceived as practical and political shortcomings of “traditional” fiat currencies.
Cryptocurrency’s technical foundations date back to the early 1980s, when an American cryptographer named David Chaum invented a “blinding” algorithm that remains central to modern web-based encryption. The algorithm allowed for secure, unalterable information exchanges between parties, laying the groundwork for future electronic currency transfers. This was known as “blinded money.”
By the late 1980s, Chaum enlisted a handful of other cryptocurrency enthusiasts in an attempt to commercialize the concept of blinded money. After relocating to the Netherlands, he founded DigiCash, a for-profit company that produced units of currency based on the blinding algorithm. Importantly, DigiCash’s control wasn’t decentralized, as is the case with Bitcoin and most other modern cryptocurrencies – DigiCash itself had a monopoly on supply control, similar to central banks’ monopoly on fiat currencies.
DigiCash initially dealt directly with individuals, but the Netherlands’ central bank cried foul and quashed this idea. Faced with an ultimatum, DigiCash agreed to sell only to licensed banks, seriously curtailing its market potential. Microsoft later approached DigiCash about a potentially lucrative partnership that would allow early Windows users to make purchases in its currency, but the two companies couldn’t agree on terms, and DigiCash went belly-up in the late 1990s.
Around the same time, an accomplished software engineer named Wei Dai published a white paper on b-money, a virtual currency architecture that included many of the basic components of modern cryptocurrencies, such as complex anonymity protections and decentralization. However, b-money was never deployed as a means of exchange.
Shortly thereafter, a Chaum associate named Nick Szabo developed and released a cryptocurrency called Bit Gold, which was notable for using the block chain system that underpins most modern cryptocurrencies. However, Bit Gold never gained popular traction and is no longer used as a means of exchange.
Pre-Bitcoin Virtual Currencies
After DigiCash, much of the research and investment in electronic financial transactions shifted to more conventional, though digital, intermediaries, such as PayPal. A handful of DigiCash imitators, such as Russia’s WebMoney, sprang up in other parts of the world.
In the United States, the most notable virtual currency of the late 1990s and 2000s was known as e-gold. e-gold was created and controlled by a Florida-based company of the same name. e-gold, the company, basically functioned as a digital gold buyer. Its customers, or users, sent their old jewelry, trinkets, and coins to e-gold’s warehouse, receiving digital “e-gold” – units of currency denominated in ounces of gold. e-gold users could then trade their holdings with other users, cash out for physical gold, or exchange their e-gold for U.S. dollars.
At its peak in the mid-2000s, e-gold had millions of active accounts and processed billions of dollars in transactions annually. Unfortunately, e-gold’s relatively lax security protocols made it a popular target for hackers and phishing scammers, leaving its users vulnerable to financial loss. And by the mid-2000s, much of e-gold’s transaction activity was legally dubious – its laid-back legal compliance policies made it attractive to money laundering operations and small-scale Ponzi schemes. The platform faced growing legal pressure during the mid- and late-2000s, and finally ceased to operate in 2009.
Bitcoin and the Modern Cryptocurrency Boom
Bitcoin is widely regarded as the first modern cryptocurrency – the first publicly used means of exchange to combine decentralized control, user anonymity, record-keeping via a block chain, and built-in scarcity. It was first outlined in a 2008 white paper published by Satoshi Nakamoto, a pseudonymous person or group.
In early 2009, Nakamoto released Bitcoin to the public, and a group of enthusiastic supporters began exchanging and mining the currency. By late 2010, the first of what would eventually be dozens of similar cryptocurrencies – including popular alternatives like Litecoin – began appearing. The first public Bitcoin exchanges appeared around this time as well.
In late 2012, WordPress became the first major merchant to accept payment in Bitcoin. Others, including Newegg.com (an online electronics retailer), Expedia, and Microsoft, followed. Dozens of merchants now view the world’s most popular cryptocurrency as a legitimate payment method. Though few other cryptocurrencies are widely accepted for merchant payments, increasingly active exchanges allow holders to exchange them for Bitcoin or fiat currencies – providing critical liquidity and flexibility."