History of Cryptocurrency

The history of cryptocurrencies can be traced back to around 30 years ago. Some of the major technologies used are time-stamping, proof-of-work, and Merkle trees, which can be found in the literature of the 1980s and 1990s.

by Ivan Penkov
28 May • 4.5 min
In Analysis

Other technologies worth mentioning are public key cryptography and smart contracts, which are also integral parts of cryptocurrencies. The creator of Bitcoin, Satoshi Nakamoto, combined those technologies in a way to power an electronic cash system.

 

The history of cryptocurrency infographic

Figure 1: Narayanan & Clark for ACM (2017)

 

Linked Time-stamping

Stuart Haber and W. Scott Stornetta introduced their data structure for linked time-stamping in 1991. Bitcoin borrows some properties of their invention. Their scheme links hashes of documents together into a chain with pointers going back in time anchored to a Time-Stamping Service (TSS). The authors had the vision to build eventually a “digital notary”. Their system was used to prove that a document was created at a particular point in time. They mention that such idea could be applied to financial transactions. In Bitcoin, the documents are the transactions, which are grouped together into blocks through Merkle trees, secured by the proof-of-work, thus comprising a single chain. Outside users can trace back transactions in the linked time-stamp and prove their existence at a given time.

 

Merkle Trees

Ralph Merkle invented the Merkle trees (or “Digital signature system and method based on a conventional encryption function”) in 1989. Merkle trees are essential for the existence of cryptocurrencies. In 2009, the patent for this technology expired, which made it possible for Bitcoin to come to life. Merkle trees can compress data, making it easier to store. They are used for quick access and reference. All transactions in Bitcoin are contained in the leaf nodes of a Merkle tree. They are hashed together in pairs and all hashed pairs are hashed again until there is a single hash, which is the Merkle root. This process allows for the verification of the current blockchain and the inclusion of transactions. If a user knows the latest hash, they can verify whether their downloaded ledger is the correct one.

 

Byzantine Fault Tolerance

In 1982, Leslie Lamport, Robert Shostak, and Marshall Pease introduced the Byzantine Generals Problem (BGP), which is a game theory experiment, primarily used for reaching an agreement in untrusted distributed networks. The solution to the classical BGP requires a central authority. In Bitcoin, for the first time, this was solved without the need of a trusted party. Bitcoin’s solution is the proof-of-work (PoW) protocol, which prevents double spend attacks.

 

Proof-of-work

The first proof-of-work proposal was created by Cynthia Dwork and Moni Naor in 1992. The original goal of the protocol was to combat spam. Spam and Sybil attacks are computer security problems, where an attacker manipulates the network, similar to the BGP. Proof-of-work is designed as a protection mechanism against attacks.

Nick Szabo with his “bit gold” in 1998, Wei Dai with “b-money” in 1998, Hal Finney with “Reusable Proofs of Work” (RPoW), and Adam Beck with “Hashcash” were the only ones who came close to creating an implementation of a system for electronic cash. They are considered predecessors to Bitcoin. Nakamoto managed to improve many of the shortcomings of their designs and created a novel proof-of-work implementation, which gave birth to the first cryptocurrency – Bitcoin.