The idea of cryptocurrency
Many people are surprised to learn the idea of cryptocurrency began decades before the 2008 Bitcoin whitepaper. Although Bitcoin remains the most successful crypto to date, many failed projects led to its creation.
Some tech historians claim Dutch researchers were the first to dabble with digital currencies, but most agree that UC Berkeley’s David Chaum was the pivotal figure in crypto’s early development. In 1982, Chaum published a paper titled “Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups,” which laid the groundwork for future developments in the blockchain space.
One of Chaum’s contributions to cryptocurrency was the invention of the “blinding formula.” Using advanced cryptographic and encryption technology, Chaum successfully demonstrated how it can securely send and receive digital tokens without a central authority.
To put his theories into practice, Chaum released a digital currency called “eCash” through his company DigiCash in the 1990s. Although eCash attracted the attention of companies like Microsoft, DigiCash ran out of funds by 1998. Still, the eCash experiment would spur further development in the blockchain space.
Inspired by Chaum’s example, many developers tried to create a digital token that would mimic the price stability of gold. For instance, digital tokens like EGold and Bit Gold emerged in the late 1990s. Although these tokens weren’t successful, they would influence Satoshi Nakamoto, Bitcoin’s inventor, to emulate the properties of gold (especially its scarcity) when developing Bitcoin.
History of Bitcoin (2008-2010)
Bitcoin (BTC) began life as the housing bubble burst. In 2008, Satoshi Nakamoto published the famous whitepaper, “Bitcoin: A Peer-to-Peer Electronic Cash System,” which laid out the plan for a peer-to-peer internet-based currency.
Drawing on previous gold-influenced tokens, Nakamoto proposed a scarce supply of 21 million bitcoins. They also used a consensus mechanism called proof-of-work (PoW) to verify transactions on Bitcoin’s network were valid. Interestingly, this novel confirmation system was introduced with a failed ‘90s project, “hashcash,” whose original purpose was to cut back on spam emails.
PoW forces computers to solve an algorithmic puzzle to post new transactions on a “blockchain.” This blockchain contains all transactions on the network and is publicly viewable. “Miners” use computing power on the Bitcoin network and receive BTC rewards for every block they verify. These Bitcoin rewards have been cut in half every four years, and this will continue to occur until the 21 million supply is reached.
Nakamoto mined the first Bitcoin block (aka “genesis block”) in early 2009 and soon sent the first successful Bitcoin transaction to the developer Hal Finney. One year later, the programmer Laszlo Hanyecz made the first recorded real-world purchase with Bitcoin when he bought Papa John’s pizzas for 10,000 BTC. Crypto enthusiasts still celebrate this event annually with “Bitcoin Pizza Day” on May 22.
While these developments were exciting to those in the cryptographic space, they didn’t capture mainstream attention. Big crypto exchanges didn’t exist, and information on Bitcoin was just beginning to trickle through the internet.
Who is Satoshi Nakamoto?
The question of who Satoshi Nakamoto is remains one of the greatest mysteries in the cryptocurrency world. Many people have proposed ideas on who Nakamoto is, but all this is pure speculation. Indeed, many people believe Nakamoto deliberately wanted to be anonymous. Bitcoin may not have had the same degree of success if it had an easily targetable leader.
It’s also clear that Nakamoto had a deep distrust of centralized authority. We know this because Nakamoto wrote the 2009 headline “Chancellor on Brink of Second Bailout for Banks” into Bitcoin’s genesis block. Clearly, they saw Bitcoin as a solution to the many issues involved in the 2008 financial crisis.
We may never know who Nakamoto is (or was?), but that doesn’t detract from the influence of the Bitcoin network. If anything, Nakamoto’s anonymity gives some people more faith in using BTC as a currency.
The crypto market growth (2010-2014)
Bitcoin didn’t see its first genuine “price pump” until Forbes mentioned it in 2011. Once this story broke, BTC rose to an unprecedented high of almost $9. Before that, BTC was trading for around $1 per coin.
However, not all the initial Bitcoin buzz was positive. In the early days, Bitcoin gained a reputation on illicit online markets, especially the Silk Road. This is mainly due to the pseudonymity of transactions. Despite Chainalysis data that suggests 0.15% of crypto addresses are connected to criminals, Bitcoin is still shaking off this old stigma.
To help further Bitcoin’s acceptance and adoption, those involved in the Bitcoin community created the nonprofit Bitcoin Foundation in 2012. Bitcoin Magazine also launched its first issue in the same year.
As Bitcoin began to gain mainstream attention, it attracted new blockchain enthusiasts to the game. This led to the first altcoins, most of which “forked” off Bitcoin. Although many of these OG altcoins are no longer prominent, some like Litecoin and Ripple’s XRP are heavily traded.
Scams and the rise of Ethereum (2014-2016)
Although Bitcoin’s price rose to the triple-digit range in the early 2010s and adoption continued to increase, crypto suffered a major PR blow in 2014. The large Bitcoin exchange Mt. Gox suffered a major security breach when hackers stole 850,000 BTC.
In the early 2010s, technology for wallets was immature and there did not exist any insurance protections or centralized crypto exchanges (CEXs). Many users who were affected by the Mt. Gox hack are still waiting for a return of their lost funds.
While Mt. Gox was a disaster for Bitcoin investors, it helped spur early crypto supporters to develop secure CEXs. It’s now a standard practice for major crypto exchanges like Binance and Coinbase to offer customers insurance protection and safety features like two-factor authentication. These security improvements all have their roots in the Mt. Gox hack.
Another significant event during this period was the launch of Ethereum in 2015. Before Ethereum, non-Bitcoin crypto projects were mostly riffs on peer-to-peer payment systems with slight technical tradeoffs. Ethereum’s developers had broader ambitions for using blockchain technology. Rather than being a payment system or a store of value, Ethereum sought to decentralize the internet. Developers introduced concepts like automated smart contracts that could fulfill commands solely with code once conditions were met. It gained acclaim as a global computer, able to unstoppably execute complex code in nodes all round the node. Ethereum was also the birthplace of NFTs (non-fungible tokens) and DeFi (decentralized finance) applications.
Ethereum quickly rose to become the world’s second-largest cryptocurrency. Soon, hundreds of projects began using the Ethereum protocol to build dApps (decentralized applications). However, it wasn’t all success in Ethereum’s early days. In 2016, Ethereum suffered a severe hack in a decentralized autonomous organization (DAO) that was supposed to serve as an investment vehicle. It’s estimated hackers got away with $60 million from this $150 million fund.
The Ethereum community was split over how to handle the DAO hack. Since this was one of the first significant investments in Ethereum, some argued they needed to return the funds by “forking” the current blockchain into a new Ethereum. Others claimed they should keep the original Ethereum because true DeFi should have zero human intervention.
Eventually, the Ethereum community decided to go through with the fork. The original “Ethereum Classic” chain is still running, but it’s nowhere near as influential as the forked Ethereum.
The rise of cryptocurrency popularity (2018-present)
Bitcoin’s price skyrocketed during 2017-2018. For the first time in history, it soared through the $10,000 range and briefly touched $20,000 before falling into a “crypto winter.” During this time, developers had many heated discussions over how to scale the Bitcoin network. Some walked away from Bitcoin to create Bitcoin Cash, while Bitcoin loyalists proposed a special settlement layer on top of Bitcoin, now known as the Lightning Network.
There were also many developments in Ethereum’s ecosystem during this period. Notably, NFTs started to emerge as unique digital collectibles, especially after the game CryptoKitties created congestion on the blockchain. Projects in the DeFi category like decentralized exchanges (DEXs) also started to build on Ethereum.
Despite all this innovation, it wasn’t until 2020 that the crypto market returned to life. During this bull cycle, Bitcoin topped at almost $70,000 per coin. Major companies like MicroStrategy and Tesla put Bitcoin on their balance sheets. In fact, El Salvador made Bitcoin legal tender. Ethereum also attracted more users, thanks to the increased prevalence of NFTs and metaverse games.
However, as 2021 turned to 2022, much of this euphoria fizzled. In addition to macroeconomic headwinds, the crypto space suffered a significant blow when TerraForm Labs’ U.S. dollar stablecoin UST fell to zero. Crypto VCs and centralized lending companies tied to UST got dragged down with the broader crypto market.
Despite these negative headlines, the crypto market has retained its $1 trillion market cap in 2022.
Although crypto is still dealing with scams and hacks, it has come a long way from its Silk Road days. As more people appreciate the use cases of projects like Bitcoin and Ethereum, it’s unlikely the crypto industry will fade away.
However, since crypto has grown so large, it’s more likely to attract attention from central regulators. More governments and central banks will likely introduce new policies as more people demand access to crypto.
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