In the crypto industry, many consider Bitcoin, launched in 2009, to be the first decentralized digital asset. The latest BTC price is $28,200 shown on the international cryptocurrency exchange Gate.io, with a total market capitalization of $442,542 million. However, the truth is that Bitcoin was not the first project to develop a decentralized currency. Before Bitcoin, there were several digital currencies that people used but for short periods and on a smaller scale than BTC. Today, we discuss some of the centralized and decentralized digital currencies that were invented before Bitcoin such as Hashcash, B-Money, Bit Gold, and eCash.
Virtual Money on Gas Station
The virtual money on a gas station was one of the first recorded cases of virtual currencies, developed in the 1980s. In fact, David Chaum, an American cryptographer devised a digital currency in 1983 that was briefly used at filling stations in the Netherlands.
The main trigger for this innovative move was to deal with high cases of thefts that used to take place at gas stations. Thefts of cash were rampant at filling stations that operated during the night. Therefore, to minimize cases of these thefts a group of developers connected fiat cash to smart cards. As a result, truck drivers used the cards to pay for fuel.
With time, shoppers were able to pay for goods using point of sales (PoS) linked to their bank accounts. Chaum’s eCash payment system was designed to bring privacy to the banking system. Interestingly, Chaum published two documents, similar to present-day whitepapers, which detailed how the eCash payment system would work.
Chaum published the first “paper” on the eCash payment system in 1981, entitled “Untraceable Electronic Mail, Return Addresses, and Digital Pseudonyms. A year later in 1982, Chaum published another paper with the title, “Blind Signatures for Untraceable Payments.” It is this paper that laid a firm foundation for the anonymous transaction system we use today, involving cryptocurrencies like Bitcoin and ETH.
In 1989, Chaum and his team of developers created an eCash Protocol. However, Chaum and the team failed to forge partnerships with banks and merchants to push for the greater adoption of the eCash payment system. Therefore, he declared bankruptcy in 1989.
We mentioned a bit about Digicash above, but let’s discuss more it. Chaum aimed to make Digicash anonymous digital cash and many business people were charmed by the transaction privacy it would bring to its users. Even Microsoft wanted to integrate DigiCash into its Windows 95.
The main difference between DigiCash and most digital currencies like Bitcoin is that DigiCash was a private virtual currency while cryptocurrencies are open-source assets.
What crypto developers gained mostly from DigiCash is the use of Blind signatures, which use a mixture of private and public keys to conceal the content of the messages. The concepts of private and public keys are critical aspects of cryptocurrency technology.
Nick Szabo, a prominent member of the extropian and cypherpunk communities, was instrumental in the development of cryptocurrencies and the blockchain system. With experience in computer science and cryptography to law, Szabo proposed the use of smart contracts which depended on specialized codes rather than jurisdictional law.
Later on, Szabo proposed using a native digital currency that would flow in the digital contract and be transferred electronically from one person to another. He focused on making improvements to the concept of Digicash to create a virtual currency that was scarce, expensive to produce, and would not rely on intermediaries like banks.
As a result, Szabo developed Bit Gold which used a proof-of-work protocol, similar to that of Bitcoin. The production, ownership, and distribution of Bit Gold would be recorded on a distributed property title registry, governed by a quorum-based voting system.
Nonetheless, Bit Gold has some shortcomings. It was not fungible which made it difficult to use on a day-to-day basis. Szabo’s other improvement proposal of having a secure, trusted, auditable bank was prone to Sybil attacks which might lead to the split of the network.
Although Szabo wanted to continue with his development of a functional Bit Gold currency, he halted the project soon after Satoshi Nakamoto launched Bitcoin. This is because he believed that Bitcoin solved the problem which prevented the full-scale launch and adoption of Bit Gold.
Even the Bitcoin founder, Satoshi Nakamoto acknowledged the contribution that the Bit Gold project made to the successful development of Bitcoin. In one of the Bitcointalk forums, Nakamoto wrote, “Bitcoin is an implementation of Wei Dai’s B-money proposal […] in 1998 and Nick Szabo’s Bitgold proposal.”
Another great forerunner of Bitcoin and other cryptocurrencies is HashCash, suggested and developed by Adam Beck, a renowned cryptographer. What triggered the HashCash was a research carried out by IBM researchers Cynthia Dwork and Moni Naor in 1992 which explained how to prevent Sybil attacks, denial-of-service attacks, and spam messaging.
They devised a proposal to combat these problems. In this case, the sender of an email would complete a puzzle as proof that it is not an unsolicited email or message. This individual would then attach a copy of the solution to the puzzle to the email which acted as a proof-of-work, authenticating that the message was from him/her. This could prohibit the sending of spam.
Consequently, Adam Beck proposed a similar system for a digital currency. The virtual currency Beck proposed called HashCash would rely on hashing instead of solving complex puzzles.
Hashing is the process of using computational power to turn specific data into random strings of characters. Therefore, HashCash used proof-of-work to confirm transactions.
Wei Dai, an active cypherpunk, planned to introduce a type of peer-to-peer financial system, not regulated by the government or any central authority. It would involve the use of smart contracts with a system to solve disputes that might arise.
The virtual currency would use a shared ledger system that could connect all the participants. Also, this system would utilize the proof-of-stake consensus algorithm and have public keys, representing the users. Notably, there was a need for a server to store the transaction records for future use.
Although B-Money was never used, its system was similar to that of most cryptocurrencies which are electronic, secure, private, and anonymous. More importantly, Satoshi Nakamoto gave reference to B-Money in the Bitcoin whitepaper. The B-money was similar to blockchain-based digital cash in that it would not involve any intermediaries.
The Flooz eCash is an example of digital cash that existed before cryptocurrencies. Flooz introduced eCash in 1998 as part of its promotional and marketing strategy. Particularly, the customers who purchased goods on Flooz.com would get customer bonus cards which they could redeem at any time.
However, the customers would also purchase the Flooz eCash from the platform for $1.00. Apart from using eCash to purchase products on the platform, its holders would also buy goods from other online merchants who were affiliated with Flooz.com. Sadly, Flooz.com was closed down because there were many criminal activities occurring using that payment system.
Basically, several prominent people tried to develop and use electronic cash well before the launch of Bitcoin. The history of cryptocurrency cannot be complete without virtual money such as DigiCash, HashCash, Bit Gold, B-Money, and Flooz.com. Subsequently, the developers of cryptocurrencies such as Satoshi Nakamoto got hints from these earlier digital currencies when they developed their own cryptocurrencies.