Blockchain History

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.

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 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.

Satoshi Nakamoto shared his concept of a new, peer-to-peer electronic cash system here on the 1st November of 2008. The genesis block included this message – a reference to the bailout of banks in 2009. Satoshi sent the first Bitcoin to Hal Finney.

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.

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.

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.

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.