Crypto 101 - An Introductory Overview: Part 2/3
Understanding the origin story provides important context around cryptocurrency's core principles.
We'll cover the early digital cash attempts before Bitcoin. We'll explore Satoshi's breakthrough moment in launching Bitcoin. And we'll track recent growth years.
Believe it or not, digital cash prototypes laid the groundwork long before Bitcoin arrived. These predecessors focused on anonymity and cryptography for direct online transactions.
In 1983, cryptographer David Chaum first introduced eCash. It was an innovative anonymous digital cash system using blind signatures to tokenize value. Users would first load money from a bank. Then, they would receive unmarked blinded tokens to make payments. Finally, merchants would unblind and deposit them.
Unfortunately, eCash pilots failed to reach the mainstream. Still, they highlighted the promising capabilities of tokenized digital money.
Building on eCash research into the 1990s, DigiCash came into the picture. It allowed institutions to issue digital cash tokens and users to transact online anonymously. Mark Twain Bank licensed technology to sell DigiCash to customers at its peak.
However, the company ultimately filed for bankruptcy in 1998. It could not compete with credit cards and PayPal during the dot com bubble burst. They were early pioneers, nonetheless.
Launched in 1996, e-gold represented one of the first prominent digital currencies backed by gold reserves stored in mutual vaults across London, Dubai, and Malaysia. Account holders could exchange fiat for weighted holdings and then transact using e-gold.
Despite claiming over 5 million accounts in 2008, oversight issues and allegations forced e-gold to cease operations. The concept demonstrated the promise and usage of commodity-backed cryptocurrencies early on.
Ironically, the term "cryptocurrency" was first coined in 1998. The same year DigiCash declared bankruptcy. While that happened, virtual currency enthusiast Wei Dai published a paper titled "B-Money." In it, he outlined an early conceptual framework for an anonymous, distributed electronic cash system using cryptography to maintain integrity.
While not implemented, the paper did introduce the apt word "cryptocurrency" to describe such systems. So, despite setbacks in actual prototypes, foundational vocabulary stuck. Cryptocurrency as a concept persisted. It was just waiting for the right vehicle and conditions to break through. Bitcoin's arrival a decade later would prove perfect timing.
Lots of breakthrough innovations happened leading up to Bitcoin's arrival. Specific advances in math, encryption, and computing laid the foundation. These let developers envision secure digital money without central control for the first time.
New cryptographic achievements were important building blocks. Hash functions like SHA-256 verified data integrity and file identities. This enabled tamper-proof record-keeping and identification.
Public-key cryptography allows users to share public wallet keys to receive funds securely. Private keys then proved ownership to send payments. Merkle trees leveraged hashing to store transaction history efficiently across blockchain ledgers. They compressed data for quick, verifiable record-keeping.
Wider technological achievements also progressed. Peer-to-peer computing models showed decentralized network participants could coordinate complex functions without central servers. Increased internet speeds and hardware brought more users online with capable devices. Data transmission and encryption advanced fast, increasing digital security use cases.
Together, these innovations provided the bedrock. They enabled visionaries to develop permissionless cryptocurrencies for the first time.
As we noted in our first blog, the fiat system has its weaknesses and the global financial crisis in 2008 highlighted these flaws. Fraud, bank failures and money supply inflation ‘created’ to bail out private enterprises with public funds - the events laid bare many weaknesses in traditional finance and the political economy. During this time, many people lost trust in large banks and governments to manage the monetary system responsibly.
As a result of this climate, an individual or group of individuals sought inspiration. The Bitcoin whitepaper was published in October 2008 by the pseudonymous Satoshi Nakamoto. It offered a timely alternative to fiat currency. Bitcoin software was then launched in January 2009. Alongside it was the genesis block in Bitcoin's blockchain ledger, which serves as a public record of all Bitcoin transactions.
Bitcoin's impact reverberated across finance and technology:
Yet, a decade and a half later, Satoshi Nakamoto remains anonymous, leaving Bitcoin itself as their prime legacy.
Fun crypto culture and influential phrases also came about during these years of serious progress. These signaled changing attitudes while humanizing an often-opaque technology.
In 2013, Jackson Palmer and Billy Markus launched Dogecoin. It was a lighthearted take on cryptocurrency featuring the popular Shiba Inu "doge" meme. The meme's silly contrast to the serious crypto mystique attracted scores of first-time users. Within a short timeframe, it went viral.
Community jokes also centered around lavish and charitable "Dogecoin millionaires." These resonated, given dramatic price spikes and crashes.
In 2013, a now-famous Bitcoin forum user implored peers to "HODL" instead of "HOLD" assets during crashing prices. The typo stuck, becoming a ubiquitous trader lexicon. It's also commonly come to stand for "hold on for dear life" among crypto investors.
It captured the spirit of crypto as an investment vehicle. This defiant mantra spread as more users faced crypto's dramatic boom and bust cycles firsthand. Both veterans and converts invoked "HODL" against fear and doubt plaguing each bull run comedown. The meme continues unrelenting today, even as it eclipsed crypto to infiltrate traditional finance.
After early bootstrapping years, adoption milestones accelerated as interest and prices climbed dramatically.
In 2016, 19-year-old Vitalik Buterin co-founded Ethereum. The famous decentralized blockchain with a built-in scripting language. It enabled developers to write robust decentralized applications.
It is now the only coin that comes close to Bitcoin in terms of value and popularity.
The emergence of Ethereum also enabled the creation of decentralized autonomous organizations (DAOs). These allowed users to pool funds towards collective projects using blockchain-based smart contracts.
One of the first such DAOs, simply named "The DAO," raised over $150 million from investors in mid-2016. However, flaws in The DAO's initial smart contract code exposed a vulnerability that was soon exploited.
In June 2016, hackers managed to drain over 3.6 million Ether tokens worth around $60 million from The DAO. This seminal "DAO Hack" prompted serious discussions around blockchain security and the resilience of smart contract programming.
In late 2017, Bitcoin finally breached the psychological $10,000 milestone after months of hype and retail fear of missing out. Mainstream consciousness awoke to digital scarcity and spotted an opportunity. Although markets subsequently crashed, this milestone is stuck in public memory.
By 2021, the total crypto market cap exceeded $2 trillion, extending a feverish institutional bull market. Milestones like big public companies and even El Salvador adopting Bitcoin as legal tender signaled a potential shift. This achievement prompted scores more users worldwide to explore access.
In 2022, the crypto market came crashing down after its 2021—like every previous—bull run, plunging the industry into a long, painful "crypto winter."
Prices collapsed, with Bitcoin falling from an all-time high of around $67,000 (US) to below $17,000 by year's end. The rest of the market followed and saw a drop of 75%, while the market cap went down to only $800 million.
Driving this were several black swan events rocking industry confidence, including:
Speaking of regulations, it's worth noting that during all these years, governments worldwide have been trying to figure out how to regulate cryptocurrencies and blockchain technology. We saw different approaches, from outright bans to more friendly regulations and taxation.
As we reflect on the brief but dynamic history of cryptocurrency, this technology has reshaped our understanding of money and finance. From the early digital cash experiments to the creation of Bitcoin and the subsequent rise of numerous cryptocurrencies, each milestone has brought new innovations and challenges. While the journey has seen dramatic highs and lows, including the recent "crypto winter," the core ideas behind decentralization and digital ownership continue to drive community interest and development. As cryptocurrency matures, it remains a fascinating and pivotal force shaping the future of money in an increasingly digital world.
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Disclaimer: This article is not intended to provide investment, legal, accounting, tax or any other advice and should not be relied on in that or any other regard. The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of cryptocurrencies or otherwise.