Money has evolved over a period of thousands of years and similarly blockchain technology was not discovered over night but over a period of more than 4 decades. Breakthroughs in cryptography, various digital cash implementations, and the combination of technologies were needed to build Bitcoin..
The history of blockchain
The history of blockchain starts much earlier than Bitcoin. In Money & Cryptocurrency we discussed the natural evolvement of Bitcoin and cryptocurrency due to societal changes and global connectivity in our society – which allows us to talk to anyone and directly exchange data and values without any middlemen. This time, the focus is more specifically on the evolvement of the blockchain technology and what paved the way towards an ecosystem of hundreds of core blockchain protocols and thousands of applications and tools. While Satoshi Nakamoto introduced blockchain in the Bitcoin Whitepaper, blockchain is based on long-existing underlying technologies and decades of research in cryptography, economics and computing.
Before 1970 encryption standards were mostly unknown to the public since encryption was primarily used by the military.
- Martin E. Hellman and Whitfield Diffie published “New Directions in Cryptography” in 1976 and introduced the concept of public key cryptography to develop large, secure, telecommunications systems.
- The US government agency NBS invited the public to propose a candidate for the protection of sensitive, unclassified electronic government data and selected a slightly modified version of an IBM “symmetric key algorithm” submission and published that in 1977 as data encryption standard. This NSA-approved encryption standard led to academic scrutiny.
- Merkle discussed “Protocols for Public Key Cryptosystems” and “Secure communications over insecure channels” and Shamir et al. presented an encryption method: Publicly reveal an encryption key without revealing the decryption key and Shamir published “How to share a secret” – which is also called Shamir’s secret sharing and used for key backup.
Cryptography further advanced and David Chaum proposed the first digital cash.
- Lamport et al. discussed in the “The Byzantine Generals Problem” that computer systems must handle malfunctioning components that give conflicting information to different parts of the system.
- One important paper by Ken Thompson discusses trust in a program that is written by someone else and that it is incredibly hard to detect a bug or a trojan horse as the level of program gets lower.
- Chaum introduced untraceable electronic money but there remained the question of how to prevent anyone from making several copies of an electronic coin and engaging in double-spending without a trusted third-party like a bank. Privacy could be protected by using a coin only once but by reusing a coin, it is possible to trace and profile it.
Cypherpunks and digital cash
The US government fought against commercial encryption when a cypherpunk group & digital cash versions were launched.
- Stuart Haber and W. Scott Stornetta described secure timestamping digital documents by hashing docs and linking them.
- In 1992, Eric Hughes, Timothy C. May and John Gilmore founded a small group and created a mailing list – the name “Cypherpunks” was derived from cipher and cyberpunk – which reached up to 2000 subscribers at its peak. Discussion topics included mathematics, economics, cryptography, computer science, policy and philosphy.
- Nick Szabo published “Smart contract” – a computerized transaction protocol that executes the terms of a contract.
- In 1997, Adam Back announced Hashcat – a method of preventing spam mails by using computational power (solving hash function in order to be able to send mail). This was the first usage of the Proof of Work mechanism, that was later applied to Bitcoin. Later merkle trees were incorporated for more efficiency.
- In 1998, Wei Dai announced “b-money” which included the idea of money creation through solving computational puzzles with a decentralized consensus
The last mile to Bitcoin
The last puzzles of digital cash were solved by figuring out the double-spend problem and not needing to trust any 3rd party.
- Hal Finney introduced Reusable Proof-of-Work (RPOW) which was a combination of Wei Dai’s idea of the “b-money” and Adam Back’s “Hashcat”. Normally POW tokens couldn’t be reused to prevent double-spending them but RPOW allowed a limited form of reuse: sequential reuse. This lets a POW token be used once and exchange it for a new token.
- Nick Szabo further specified “Bit Gold” in a blog published at the end of 2005. Bit Gold was based on cryptography, proof of work and a decentralized protocol to eliminate trust in a third party but it was never implemented. It is often considered as the direct precursor of Bitcoin.
- In 2008, the Bitcoin Whitepaper was published by the pseudonym Satoshi Nakamoto. The genesis block was mined on the 3rd of January in 2009 by Satoshi Nakamoto and the first transaction was sent on the 12th of January to Hal Finney.
Blockchain since 2009
Most people’s attention has been drawn from Bitcoin price movements, ICOs and stories about early Bitcoin purchases and their current value. On May 22nd of 2010, one person bought a pizza for 10,000 BTC which was at the time 25 USD and would be 100,000,000 USD today. One Bitcoin exceeded the value of 30 USD by the start of 2011, 1,000 USD by the end of 2013 and reached an all-time high of 20,089 USD by the end of 2017. In the past 8 years, there were also more than 10 major corrections during which the price declined more than 30%. For example, Bitcoin lost 87% of its market capitalization from the 30th November of 2013 until the 14th January 2015. Businessmen and investors have shared the message: At the moment, Bitcoin is highly speculative and you should only invest what you’re willing to lose.
While the Bitcoin dominance (Bitcoin market share of all publicly traded cryptocurrencies) is still above 60%, the industry now includes thousands of other blockchain projects, cryptocurrencies and companies. The stated market capitalization of almost 300B USD on Coinmarketcap captures only some part of the ecosystem’s value. Valuations of exchanges, consultancies, companies, private-equity funded projects, new projects and unlisted cryptocurrencies are not included. The state of crypto report provides more insights to the blockchain industry than the Bitcoin price and crypto market capitalization statistics.
How did crypto and blockchain get to the current state? Here is a list of major milestones since the Bitcoin launch in 2009.
First Altcoin: Namecoin
Namecoin was launched in April 2011 by forking Bitcoin’s code base and also utilizing the proof of work algorithm. The goal was to decentralize domain registration and improve privacy in the internet with a censorship-resistant top-level domain.
Charlie Lee released Litecoin in 2011 with the goal of improving transaction speed by decreasing the block generation time to 2.5 minutes instead of Bitcoin’s 10 minutes. Litecoin is often called “Digital Silver” in comparison to Bitcoin (“Digital Gold”).
At the end of 2013, Nxt launched a first proof-of-stake blockchain from scratch which was more flexible and introducing features such as asset creation and a DEX (Whitepaper). The Nxt core infrastructure is more complex than Bitcoin but enables building apps and services more easily on top. Nxt brought radical innovations and was the starting point for a number of similar protocols.
At the end of 2013, Vitalik Buterin proposed Ethereum in this whitepaper. Ethereum’s goal was to enable decentralized apps and decentralized organizations which required a scripting language. After a crowdsale and specifications of putting executable smart contracts in the blockchain, Ethereum was launched in 2015 and is often referred to as “decentralized computer”. The Ethereum project, its virtual machine and smart contracts have attracted a large number of developers, protocols and apps. Founders such as Vitalik Buterin, Charles Hoskinson, Joseph Lubin and Gavin Wood have further innovated and shaped the blockchain industry ever since.
Silk road, Mt. Gox and scams
The adoption of cryptocurrencies and blockchain was driven by a range of different ecosystem members and users. In 2011, Ross Ulbricht founded Silk Road – an online black market and modern dark market that allowed users to anonymously purchase drugs and other products and services utilizing Bitcoin as means of exchange. At the end of 2013, the website was shut down by the FBI and Ross Ulbricht was sentenced to a life in prison without possibility of parole for 7 charges related to Silk Road.
One of the earliest Bitcoin exchanges, Mt. Gox became the biggest and was responsible for nearly 70% of trading by the end of 2013. More than 650,000 Bitcoin went missing and Mt. Gox had to file bankruptcy. During investigations it was found that Bitcoins were continuously stolen since 2011 from one of Mt. Gox hot wallets which showed the security risk of leaving funds at exchanges and the lack of implemented security measures.
Besides various other exchange hacks – not blockchain hacks – there occurred a variety of other scams such as blackmail attempts, fake exchanges, free giveaways, impersonations, malware, ransomware, phishing, scam coins, pumps and dumps as well as pyramid schemes and ponzi schemes. These attacks have not stopped and it is important to stay alert and help others to avoid scams and Ponzi schemes such as Bitconnect’s “high-yield investment program” (See famous Bitconnect video) or more recently the 2B USD PlusToken scam which reflect badly on the crypto industry.
ICOs & the DAO
In July 2013, Mastercoin held the first token sale and raised 5,000 Bitcoin in exchange for their token. In the following years more and more projects such as Ethereum utilized crowdfundings to finance their project development and growth. With the launch of blockchain protocols such as Nxt and especially the Ethereum network and smart contracts, it became easy to launch blockchain-based, “secure” crowdfundings via ICO token sales.
In 2016, the Ethereum ecosystem decided to crowdfund a decentralized autonomous organization that should function as a form of investor-directed venture capital fund and support commercial and non-profit businesses. The DAO was open-source, not bound to any state and there remain uncertainties how to deal with such organizations. Besides these uncertainties, a bug in the code enabled siphoning off one-third of The DAO’s funds to a subsidiary account. This led to a fork of the Ethereum blockchain in order to restore virtually all funds to the original contract, and the split from “Ethereum Classic” which kept the original unforked blockchain and sticked to “Code is law”. Highly controversial discussions remain about handling a protocol bug and exploitations since we want to prevent any harm from blockchain users but also ensure that you can trust in the immutability of records.
ICOs and token sales became extremely popular in 2017. At the end of 2017, there were more than 50 offerings a month and 40 times more capital was raised in 2017 than in 2016. Some of these ICOs raised many millions of USD within hours: Filecoin was able to raise 200M USD within one hour and a total of 257M USD. The simplicity of issuing a token and collecting funds in Ether and Bitcoin attracted bad projects and scams, and also alerted regulators to watch the market more closely and prove whether ICOs complied with securities laws. This ICO bubble burst in the beginning of 2018 and it became much harder to raise capital through a “traditional ICO”. This led to a temporary rise of initial exchange offerings (IEOs) where exchanges engage in due diligence. At that time, interest in security token offerings (STOs) grew since they comply with securities laws, provide investors with certain claims against a company – unlike previous utility token offerings, and open the door for more institutional investors. The market infrastructure for security tokens is being built but liquidity and adoption is still not in sight.
Projects, new protocols, the middleware stack and applications
There was a time when people promoted the implementation of blockchain to any business and application. In the past few years, this has slightly changed and we’re seeing the blockchain industry mature with regulators taking an active stance, serious projects complying with existing laws, and traditional companies from all verticals forming consortia and building proof of concepts to experiment with the technology. The blockchain infrastructure got much more sophisticated with large exchanges, wallets and tools, consultancies and tech companies offering support and enterprise-grade applications.
Equity investments and venture capital poured into new projects. In many cases, projects received large seed funding from institutional investors and started building in stealth mode instead of writing a whitepaper and going for an ICO. Some of these projects are building layer 1 blockchain protocols that aim to improve or replace existing protocols such as Bitcoin and Ethereum in terms of scaling, privacy, smart contracts or usability and others aim to connect existing protocols. At the same time, more layer 2 protocols and projects aim to solve specific use cases – so far mostly in the Ethereum ecosystem.
By now, there is a clear path towards a tech stack of interoperable blockchain protocols and various Web 3 components. This shall enable people to privately use the internet, remain in ownership and control of data and values, and organizations to create valuable products and services that may advance our societies significantly.
We’ve witnessed the rise of Bitcoin, Altcoins and other blockchain projects and the inflow of capital and talent. During the past 11 years an industry established building core protocols, tools and applications for the future Web. Discussions changed from a peer-to-peer cash experiment to solutions in all verticals that may improve our societies and people’s sovereignty. Bitcoin & blockchain has come a long way but more education and improvements in areas such as scalability, privacy and usability are required to enable more parties to join.
Nakamoto Institute - Literature
A great list of resources that helps to contextualize Bitcoin into the broader story of cryptography and freedom.
Gwern - Bitcoin Is Worse Is Better
This article includes the technologies that made Bitcoin possible.
Bitcoin.org - Scams
Here’s a good list of potential attack vectors and scams.
Wikipedia - Silk Road
Silk Road was an online black market that utilized Bitcoin for payments.
Wikipedia - The DAO
The DAO was supposed to function as VC fund for businesses. A bug was exploited and split the Ethereum community.
FullBlock Solutions - Overview of DLT funding options
Blockchain is becoming an alternative financing option throughout the lifecycle of projects and companies.
Multicoin Capital - The Web 3 stack
This Web3 stack (2019 Edition) shows a set of interoperable networks. It is a very good but slightly biased overview.
State of crypto - State of adoption
This is a collaborative report on the state of adoption in crypto by a collection of industry analysts, VCs, and startups.