Bitcoin predecessors played a crucial role in its creation, as most innovative inventions are not developed in isolation. Bitcoin’s inventors drew inspiration from previous experiences and combined various proven concepts in an unprecedented way to create new characteristics for decentralized digital cash. Here are some technologies and ideas that may have directly or indirectly influenced Bitcoin, paving the way for its revolutionary development as a cryptocurrency
Bitcoin Predecessors: The Early Attempts at Digital Currencies and Their Impact
Bitcoin is often referred to as the first decentralized digital currency, but there were actually several attempts to create similar systems before it. These early digital currencies can be considered predecessors to Bitcoin and helped pave the way for the cryptocurrency revolution we see today.
One such digital currency was e-gold, which was created in 1996 and allowed users to make digital payments backed by gold. While e-gold was initially successful, it faced legal issues and was eventually shut down by authorities in 2007.
Another early digital currency was Liberty Reserve, which was founded in 2006 and allowed users to make anonymous transactions. However, it was also plagued by legal issues and was shut down by authorities in 2013.
Despite the challenges faced by these early digital currencies, they were important stepping stones towards the development of more secure and resilient decentralized payment systems like Bitcoin. By learning from the mistakes of their predecessors, cryptocurrency developers have been able to create a more robust digital currency ecosystem that is rapidly gaining mainstream acceptance.
Bitcoin is often credited as the first decentralized digital currency, but it was not the first attempt at creating a digital payment system. Prior to Bitcoin, there were several digital currencies and electronic cash systems that can be considered as Bitcoin predecessors. Some of these early systems faced legal issues and were eventually shut down, but they were important stepping stones in the development of more secure and decentralized payment systems. Here are some examples of Bitcoin predecessors:
BITCOIN PREDECESSORS: DIGICASH
It is hard to overstate the impact that David Chaum had on the movement towards electronic cash, by which he meant a privacy preserving digital asset that could settle financial obligations. Chaum, an early cypher punk, described this concept in 1983 in a paper entitled ‘Blind signatures for untraceable payments’ in the journal Advances in Cryptology Proceedings. He wanted a bank to be able to create digitally signed digital lumps of cash for their customers.
The customers could spend the digital cash at shops, who would then redeem the digital cash with the bank. When the merchant redeemed the digital cash, the bank would see that the digital cash was good, but it did not know which of its customers the digital cash had originally been assigned to. The individual transactions were therefore anonymous as far as the bank was concerned. Digicash was the Amsterdam based company incorporated to commercialize this technology.
The system was called eCash, sometimes Chaumian eCash, with the tokens themselves called CyberBucks. Although a few banks did some trials with CyberBucks, Digitcash filed for bankruptcy in 1998, unable to secure a deal to keep it afloat.
BITCOIN PREDECESSORS: B-MONEY
In November 1998, Wei Dai, an American-educated cryptography researcher and cypher punk, published a short paper111 describing b-money under two protocols. b-money would operate on an untraceable network where senders and receivers would be identified only by digital pseudonyms (i.e., public keys).
Every message would be signed by its sender and encrypted to its receiver. Transactions would be broadcast to a network of servers who would keep track of account balances and update them when they received signed transaction messages. Money creation would be agreed by the participants in a periodic auction.
BITCOIN PREDECESSORS: HASHCASH
In 1992, Cynthia Dwork and Moni Naor described a technique for reducing spam (junk email) in their paper,112 ‘Pricing via Processing or Combatting Junk Mail,’ by creating a hoop that email senders would have to jump through before sending emails. Email senders would have to attach a kind of proof or receipt to their outbound emails demonstrating that they had incurred a very small ‘cost’. Recipients would reject inbound emails without these receipts.
The ‘costs’ incurred by the senders would be tiny at normal email volumes, but add up and discourage spammers who send out millions of emails. The ‘cost’ wasn’t a payment to a third party, but it would be incurred as ‘work’ in the form of repeated calculations that had to be made, to ensure an email would be accepted. So the receipt would be a ‘proof’ that repeated calculations, or ‘work’ had been done, leading to the phrase ‘proof-of-work’.
In 1997, Adam Back proposed a similar idea113 and described a ‘partial hash collision-based postage scheme’ which he named ‘Hash cash’. Bitcoin mining uses this concept of forcing someone to do some work, and proving they have done it, before allowing them access to a resource. He followed up in 2002 with a paper,114 ‘Hash cash—A Denial of Service Counter-Measure,’ describing improvements and applications of proof-of-work, including hash cash as a minting mechanism for Wei Dai’s b-money electronic cash proposal.
BITCOIN PREDECESSORS: E-GOLD
E-gold was a website opened in 1996 and operated by Gold & Silver Reserve Inc. (G&SR) under the name ‘e-gold Ltd’ that allowed customers to open accounts and trade units of gold between each other. The digital units were backed by gold stored in a bank safe deposit box in Florida, USA. E-gold didn’t ask users to prove their identity, and this made it attractive for the underworld. It became very successful. It was reported
to have up to 3.5 million accounts in 165 countries in 2005 with 1,000 new accounts opening every day115, but the website was eventually shut down due to fraud and allegations of facilitation of crime116. Unlike Bitcoin, it had a centralized ledger.
LIBERTY RESERVE
Like e-gold, Liberty Reserve, based in Costa Rica, allowed customers to open accounts with few personal details, nothing more than a name, email address, and birth date. Liberty Reserve made no attempts to verify these, even for obviously false accounts named ‘Mickey Mouse’ and so on. During an investigation117, a US agent opened a functional account with a username ‘To Steal Everything’ in the name of ‘Joe Bogus’ who lived at ‘123 Fake Main Street’ in ‘Completely Made Up City, New York’ and wrote that it would be used for ‘shady things’.
As a result of its relaxed controls, Liberty Reserve was used extensively for money laundering and other criminal proceeds, more than $6 billion according to ABC News118. It served over 1 million customers before it was shut down in 2013 by the US Government under the Patriot Act.
NAPSTER
Napster was a peer-to-peer filesharing system that was live between 1999 and 2001. It was created by Shawn Fanning and Sean Parker, and was popular with people who liked to share music, particularly in mp3 format, and who didn’t like to pay for it. The idea was to allow anyone to copy and share content saved on users’ hard drives. At its peak the service had about 80 million registered users. It was eventually shut down because its relaxed approach to the sharing of copyright material wasn’t appreciated by those with interests vested in that material.
Napster’s technical weakness was that it had central servers. When a user searched for a song, their machine would send the search request to Napster’s central servers, which would return a list of computers storing that song and would allow the user to connect to one of them (this is the peer-to-peer bit) to download the song. Although Napster itself didn’t host the material, it made it easy for users to discover others who did. Centralized services and entities running those services are easy to shut down, and so it was, to have its role replaced by BitTorrent, a decentralized peer-to-peer file sharing system.
MOJO NATION
According to CEO Jim McCoy, Mojo Nation was an open source project that was a cross between Napster and eBay. Launched in or around 2000119, it combined filesharing with microtransactions of a token called Mojo, so that file sharers could be compensated for sharing content. It split files into encrypted chunks and distributed them such that no single computer would host an entire file. Mojo Nation failed to gain traction, but Zooko Wilcox-O’Hearn, who worked on Mojo Nation later founded Zcash, a cryptocurrency like Solana focused on transaction privacy.
BITTORRENT
BitTorrent is a successful peer-to-peer filesharing protocol that is still in wide use today. It was developed by BitTorrent Inc, a company cofounded by Bram Cohen who worked on Mojo Nation. BitTorrent is popular with those sharing music and movies, users who may once have used Napster. It is decentralized: each search request is made from user to user rather than via a central search server. As there is no central point of administration, it is hard to censor and shut down.
As a theme, whether we consider money (e-Gold, Liberty Reserve, Bitcoin etc), or data (Napster, BitTorrent, etc), the evidence shows that etc), or data (Napster, BitTorrent, etc), the evidence shows that decentralized protocols are more resilient to being shut down than services with a central point of control or failure. I expect the trend of decentralization to continue in the future, driven in part by concerns that authorities are overextending their reach into private social matters.