How Bitcoin Came into Existence
Bitcoin is a digital currency created in 2009. But how is Bitcoin created and what makes it so unique?
In short, it is unique due to the fact that it is not controlled by any government or financial institution. Transactions are verified by the network nodes through cryptography and recorded in a public ledger called a blockchain. Bitcoin is often referred to as a ‘peer-to-peer electronic currency system’. This means that transactions are processed directly between users, without the need for a third party.
The prehistory of digital currencies
Before bitcoin was invented, history knows a series of scholars and research in the field of decentralised digital currencies. In 1988, futurist Max Mohr expounded the philosophy of ‘externalism’ in a series of written principles that described ‘an evolving framework of values and standards for the continuous improvement of the human condition’ through the use of new technologies such as cryogenics, artificial intelligence, robotics, genetic engineering, space travel and more. This ideology brought together a community of scientists and futurists who shared these ideas in early online forums.
From the late 1980s to the early to mid-1990s, futurists prototyped alternative currency projects, idea markets, prediction markets, reputation systems and other experiments that anticipated much of today’s crypto space. Some cryptocurrency pioneers were active in the Extropian community, including Nick Szabo and Hal Finney.
Who is Hal Finney and how did he contribute to the creation of bitcoin?
On 12 January 2009, the first transaction after the creation of Bitcoin took place between Satoshi and cryptocurrency activist Finney in block 170. It is also said that Finney was the first person to mine Bitcoin together with Satoshi after the network was launched.
Hal Finney is a programmer and an early supporter of Bitcoin who was the first person to receive a Bitcoin transaction from Satoshi Nakamoto. He is also credited with developing the first proof-of-work system used by bitcoin and other cryptocurrencies. Finney was an active member of the cryptocurrency community, which was instrumental in the development of bitcoin. He passed away in 2014 after a long struggle with amyotrophic lateral sclerosis (ALS).
Nick Szabo and how did he contribute to the creation of bitcoin?
Nick Szabo was a programmer, cryptographer and lawyer, best known for his work on ‘smart contracts’. He is also credited with developing the concept of bit gold, which many believe to be the first precursor to bitcoin. Szabo has been actively involved in the cryptocurrency community since the 1990s and his work has played a significant role in the development of cryptocurrencies.
David Chaum is perhaps the most influential person in the field of cryptocurrencies. His pioneering work in digital currency systems dates back to the 1980s, when the Internet was still in its infancy, before the launch of the World Wide Web. In 1981.
Chaum published the groundbreaking paper ‘Untraceable Email, Reverse Addresses, and Digital Aliases’, a seminal paper in the field of Internet privacy that led directly to the creation of privacy protocols such as Tor. In 1982, the Privacy Shield was introduced. Chaum published ‘Blind Signatures for Untraceable Payments’, a seminal paper outlining a system of anonymous transactions that directly inspired future experiments with digital currencies. The eCash payment system is Chaum’s attempt to bring the privacy of physical money and currencies into the digital realm with the advent of electronic banking.
In 1989, Chaum founded DigiCash. Based in Amsterdam, Chaum and his team created the eCash protocol. Although the venture did not last, eCash broke new ground in the field of digital currencies. While not a fully digital currency like Bitcoin, eCash prefigures what are now known as central bank digital currencies (CBDCs) and stablecoins – digital assets backed by reserves and issued by a trusted third party, such as a bank or a company.
Founded by Douglas Jackson and Barry Downey in 1996, E-gold is a digital currency system backed by gold reserves in vaults in London and Dubai.
Named in grams, E-gold provided an alternative online payment system that could transfer value quickly and without borders, but the project ran into significant legal and systemic problems. The E-gold economy was managed by a central server operated by a single company, creating a single point of failure or disruption in the event of a dispute between operators or suspension/seizure by the authorities. Initially, the E-gold system did not have many restrictions on account creation, which led to the currency being used in various criminal activities.
Although Jackson and the team worked hard to counter the criminal use of E-gold, they were eventually found guilty of running a money transmission business without a licence and the business was shut down. While eCash was an electronic currency system implemented in coordination with the existing banking system, E-gold operated as a parallel financial system built entirely without the recognition or involvement of regulators.
At the time, the US government was wary of public access to public key cryptography and the means to encrypt its Internet presence. Companies like E-gold bring these concerns into the process of transacting over communication networks. Much of the regulatory friction surrounding the alternative digital currencies that emerged at that time persists to this day.
In 1992, IBM researchers Cynthia Dwork and Moni Naor explored methods to combat Sybil attacks, denial-of-service attacks and spam messages in rapidly evolving Internet services such as e-mail. In their paper, ‘Pricing by Processing, or Fighting Spam’, the two propose a system in which the sender of an e-mail performs a certain amount of computational work to solve a cryptographic puzzle.
The sender then attaches a proof of the solution to the e-mail: a proof of work or PoW. Although the computational cost of this process is rather trivial, it would be enough to effectively deter spam. The system would also have a ‘loophole’ that would allow a central authority to solve the puzzle immediately without expending labour.
In 1997, Adam Beck, a 26-year-old graduate of the University of Exeter, joined the cypherpunk mailing list and proposed a similar system called Hashcash. This system had no traps, central authorities or emphasis on cryptographic puzzles. Instead, the process focused on hashing.
How did Bitcoins come into existence?
After publishing his eight-page proposal for a new digital money system on a mailing list, Satoshi submitted the draft to an online group of cryptographers, computer scientists and digital money veterans for discussion and debate. Although Satoshi wrote much of Bitcoin’s code base before the white paper was published, it was open to public review among an online community of peers.
Since its inception, Bitcoin has been an open source software project built and maintained by a community of developers and enthusiasts. On 8 November 2008, Bitcoin was registered on the open source software development platform SourceForge. Bitcoin then became a team project. On 3 January 2009, the Genesis block (or block zero) of Bitcoin was mined by Satoshi (over a seven-day period). In this initial transaction, also called a generational transaction or ‘coinbase’, Satoshi included the following famous message:
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”
This announcement was a clear signal of Bitcoin’s intentions. While the world was experiencing the biggest financial crisis since the Great Depression, a new vision of a monetary system separate from the state was born. Bitcoin has come a long way since then. Today it is used by millions of people around the world and has become an accepted form of payment for many companies.
Although there are still some challenges to overcome, it seems clear that bitcoin is here to stay. Only time will tell what the future holds for this incredible innovation.
The first bitcoin transactions in the real world
In 2010, programmer Laszlo Haniec made the first real-world transaction, buying two pizzas for 10,000 bitcoins. This event is often considered the moment when bitcoin was transformed from an academic concept into a real currency that can be used to purchase goods and services.
Haniec’s purchase of the pizza highlights another of bitcoin’s unique features: its divisibility. Each bitcoin can be divided into 100 million smaller units, called satoshi. This means that even if a bitcoin is worth a lot in the future, it can still be used for small purchases without having to sell any fractional amount.
Bitcoin is unique because it is not controlled by a government or financial institution. Transactions are verified by the network nodes through cryptography and recorded in a distributed public ledger called a blockchain. Bitcoin is often referred to as a ‘peer-to-peer electronic currency system’. This means that transactions are processed directly between users, without the need for a third party.
The fact that bitcoin is not subject to government regulation or control makes it attractive to many people. However, it also means that there is no central authority overseeing the network, which could potentially cause problems in the future. Despite this, bitcoin has shown incredible resilience so far and continues to grow in popularity despite various challenges.
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Author: Marcin Woźniak
In 2018, Marcin first encountered blockchain technology and Bitcoin, which instantly captivated his interest. He possesses a profound passion for technological innovation and the ongoing digitalization of the financial sector. Marcin eagerly anticipates the transformative potential of blockchain on a global scale and is enthusiastic about contributing to this revolutionary movement.