The Origins of Bitcoin

The origins of bitcoin go all the way back to 1983 when noted American cryptographer David Chaum introduced the concept of a borderless universal electronic currency in his paper Untraceable Electronic Mail, Return Addresses, and Digital Pseudonyms. In the paper, Chaum describes a payment system in which two people could make a hand to hand transaction digitally in a fully secure and private manner. Back then the idea of a secure digital currency was a mere concept, but Chaum was determined to make it reality. In 1988, he extended the idea into enabling offline transactions that were capable of detecting double-spending. By 1990 he co-founded DigiCash, the first digital cash company employing cryptographic protocols which made transactions completely anonymous.

It is possible that the idea for DigiCash was ahead of its time. In 1990, the internet was not widely available to the public. (See graph) It was in 1993 that Chaum invented the digital payment system “ecash.” The first electronic payment ever sent was in 1994. Unfortunately for Chaum, as he put it “[ecash] was hard to get enough merchants to accept it, so that you could get enough consumers to use it, or vice versa.” The company subsequently filed for Chapter 11 bankruptcy in November of 1998.

It is easy to write off DigiCash as a classic example of staggered technology adoption, another tech startup coming at the wrong time. However, other interpretations are possible. In the early 90’s the dot com boom was taking off and internet companies were hot. DigiCash was no exception, the company received many offers upwards of $20 million. If you could believe it, Bill Gates himself offered Chaum $100 million to take DigiCash public. Gates had contacted him offering to integrate ecash into every copy of Windows 95, a seemingly perfect deal, yet Chaum declined. The deal could have been a game changer, potentially bringing digital currency into the mainstream long before Bitcoin was even conceived. It is interesting to imagine a world that could have been a cashless society before the iPod was invented.

To understand Chaum’s decision, one must first understand Chaum himself. Then CEO Chaum was often described by insiders of the company as a “heavily paranoid man.” In one instance, an offer by ING Investment Management fell through even after 8 people from ING, including the CEO, were in the room with Chaum but he still refused to sign. Employees and executives of DigiCash grew immensely frustrated with their CEO’s reckless behavior. The company reached the breaking point and ousted Chaum from the company he had built from the ground up, but it was already too late. By that time Chaum’s long string of blunders had caused the company irreparable damage. The irony in all of this was that perhaps the untrusting nature of the man who wanted to create “trustless” transactions was the very reason for its’ collapse.

Even if DigiCash had been implemented and rolled out flawlessly, there was a man at Microsoft who did not envision digital currency the same way Chaum did. Nathan Myhrvold, then Chief Technical Wizard at Microsoft, spoke on the subject of digital currency saying “we have a zillion different ways of doing financial transactions. There's cash, checks, credit cards, debit cards, wiring money, traveler's checks ... each of these has a particular point. We're going to see that much diversity in digital money.” Myhrvold puts it just right: digital currency was never going to be singular. Today we have a dynamic system that incorporates hundreds of different currencies that provide functions others do not. However, this massive network of competing digital currencies didn’t just appear out of thin air. There would be many more companies that would build electronic payment systems - for instance, Web Money, PayPal, Payoneer, Zelle and Venmo just to list a few. But these systems lack both the security and anonymity that Chaum had envisioned. In fact, they aren’t even digital currency at all, they are nothing more than payment processors.

The centralized structure of electronic payment systems like PayPal felt wrong, the idea that someone could freeze your funds, limit access, store all transaction data, even hypothetically rewrite the balance of your account was not the original vision of digital currency. Among the issues of centralizing electronic currency lay the potential for excessive fees and a lack of global access to the services. Payment processors solved none of the issues DigiCash had set out to solve. We were still a world that constantly required exchanging one another’s fiat back and forth. These issues associated with the existing systems reenergized one man enough to go out and develop his own digital currency - one that fit Chaum’s vision -  one to end them all.

Enter "Satoshi Nakamoto," the anonymous creator of Bitcoin. In 2008, Nakamoto published a paper entitled Bitcoin: A Peer-to-Peer Electronic Cash System in which he lays out the foundation for a truly decentralized, completely anonymous digital currency. Bitcoin employs the techniques of cryptography, once spoken of by David Chaum, which enables the system to operate without need for a trusted third party. The system of cryptographic proofs verifies transactions in a way that is computationally impractical to reverse. To combat the issue of double-spending each transaction is posted to a timestamp server which employs computational proof of the chronological order of transactions. The system uses distributed computational power, a complex system of nodes that are used to solve complex algorithms to keep the network running. This system is facing many problems today due to the unexpected rate at which people were able to develop incredibly powerful ASIC chips. Today there is a great deal of competition in cryptocurrency and Bitcoin's future is not clear, but that is an issue for another thread.