Blockchain's DNA

Probably you know that prior to the cryptocurrency boom in 1990-2000 there was dot-com bubble, have pretty much in common with cryptocurrencies overoptimism era. David Chaum, Berkley-based cryptographer and "the father of cypherpunks", spent his life developing cryptographic protocols for untrusted environments. In his seminal paper (Chaum, 1983) he proposed a protocol for an electronic payment system, in which
1) the third party could not identify the payee, time or amount of transaction from particular person;
(2) payee could provide proof of payment in exceptional circumstances;
(3) owner of stolen money could prevent a thief from using the money. In the same 1983, he patented the system, which he called a blind signature protocol.

We will discuss it in more details later in this longread. Based on his innovative ideas, Chaum launched a DigiCash company, which developed the first cryptocurrency in the world. As many dot-com startups DigiCash was met with huge enthusiasm by investors and potential partners, among which were Microsoft, ING Barings Bank and Netscape. Apparently, as a CEO Chaum did much worse than as cryptographer. After a series of failed negotiations and managerial mistakes, in 1998 Ecash lost the competition to credit cards and vanished — as many dot-com companies did

The first digital stablecoin (in one of the next long reads we will discuss this notion extensively) was invented in the 20th century by Douglas Jackson and Barry Downey, a doctor and a lawyer, respectively. Practically, they bought physical gold, deposited it in traditional bank's vaults, sold it through the website, and provided the first digital merchants with the first non-credit card venue to perform transactions, calling their product e-gold. Just like Facebook's Libra, they tried to create both a hook and a barrier — digital merchants would maintain demand for some stable venue to support their operations, and gold peg would provide this stability to the system. The thing was the second cryptocurrency in the world and the first to acquire one million users. However, e-gold quickly became hijacked by scammers, which greatly appreciated its anonymity of accounts and partial sovereignty from the banking system. Several lawsuits from competitors and increased attention from authorities sent Douglas Jackson to jail and e-gold — to the bottom

In the mid-90s digital currencies were developed along several paths. PayPal was functioning over Internet protocols, but allowed peer-to-peer transactions, just like non-digital money; FirstVirtual and Millicent required its participants to be "digital merchants"; Russian-based WebMoney picked up Chaum's ideas of blind signatures. That was the period of enthusiasm, diversity of solutions and real-life experiments

Inspired by the Millicent system, which allowed to perform micropayments as low as 1/10 of the US cent, Rivest & Shamir (2001) developed two "theoretical" micropayment systems, based on hash functions, which proved to be much more efficient than public-key-based systems. There were three types of actors in Millicent, PayWord, and Micromint: merchants, brokers, and customers. Brokers "know their customers" and, by authorizing customers to merchants, create trust in the system. Merchants accept and accumulate micropayments and exchange micropayments with brokers. Orientation towards micropayments on the one hand, and long-term relationships between customers and merchants, on the other, allows using fast light-weight security solutions. The key difference between the two systems is that while PayWord is post-paid, Micromint is a pre-paid system with internal coins, which have to be minted. PayWord is ideal for pay-per-view kinds of transactions — hence, the name

Hashcash became an anti-spam system in 1997; it was a piece of software, released by Adam Back. Later in Back (2002) he described the idea; many note the similarity of these ideas to Dwork & Naor (1992) though. Ideas of hashcash proof-of-work directly influenced Nakamoto's Bitcoin

Another concept which greatly influenced Bitcoin, was Dai (1998). It was a system, based on asymmetric cryptography, where each user (or public key) was broadcasting transactions to the network. Nodes were responsible for updating balances on distributed "wallets", creating money by solving difficult computational problems, and verifying solutions, obtained by others

Interesting fact: surges of interest to cryptocurrencies were linked to years of financial turmoil. In 1998, financial markets were hit by Russian and Asian financial crises. In the same year Szabo (1998) proposed a system, called bit gold. Just as b-money, it used computational problems and proof-of-work to process transactions. All details about transactions are stored in an immutable title registry, which had a chain-like structure very similar to blockchain. In his proposal Szabo also addressed a selfish mining problem, calling it "hidden supply gluts"