October 31, 2008, according to Coinmarketrate.com, in Satoshi Nakamoto’s document “Bitcoin: A Peer-to-Peer Electronic Cash System”, an unprecedented technology project was published. The invention of the Bitcoin cryptocurrency and blockchain came in handy: people were just starting to do more and more business over the Internet.
At the same time, the financial crisis gave reason to doubt the stability of the economic system. So why not give a chance to the digital invention of money? In the more than thirteen years since then, Bitcoin has experienced ups and downs – and now it can even conquer Wall Street.
But in fact, the history of Bitcoin and other digital currencies goes back much more than 13 years. In fact, the idea behind it is much older. If you carefully study the founders of Bitcoin and blockchain, you will come across several unusual projects. Even the laborious extraction of money that no one can put in their pocket, but everyone can trade them without banks, has been around for hundreds of years.
Stone money on Yap may be the Original Bitcoin
Are limestone chunks the size of a man with a hole in the middle really supposed to be the forerunners of our current cryptocurrencies? Archaeologists have at least discovered a number of interesting similarities between the stone currency on the small island of Micronesia and how Bitcoin and blockchain work.
Long before Europeans crossed the western Pacific Ocean, Yap Island had an economy based not on coins, but on round stones up to four meters in size: Paradise. Rai stones were quarried in quarries on remote islands and transported by Japanese over land and water with great effort.
Arriving in their native village, the residents put paradise on public display. Each stone was evaluated collectively based on its shape, size and difficulties associated with transportation. Tribal leaders, family clans, or individual residents could claim ownership of the stone. Then everyone in the village knew which paradise belonged to whom. If the owner changed, the stone didn’t even need to be moved. Finally, the change of ownership was announced at public meetings. Rai still have monetary value on Yap today, they are given at weddings.
Paradise vs Bitcoin
If you look closely at the Rai economy, then the comparison with cryptocurrencies is not far-fetched. This is what archaeologist Scott Fitzpatrick and economics professor Stephen McKeon from the University of Oregon found out. Like the stones of paradise, Bitcoins need to be mined, only not with the help of labor, but through complex computational processes.
Using both currencies, everyone can understand how much work it took to create a unit, and accordingly, how high its cost is. Rai storage takes place in front of everyone, as in the case of Bitcoin, where they can also be viewed at any time thanks to digital registration in the blockchain. After public confirmation of the cost, both currencies can be freely exchanged for services and goods. On Yap, residents conduct transactions verbally so that everyone always knows who owns which “token” paradise, and what they exchanged for it. In blockchain, transparency and trust are created by recording transactions in inseparable and viewable data blocks.
The similarity between an ancient, incomprehensible stone currency, which was traded exclusively on a tiny island in the middle of the ocean, and rapidly developing cryptocurrencies with very complex calculations is simply fascinating. They provide a deep insight into the human understanding of value and trade. But only with the development of cryptography could modern digital currencies appear.
On the Micronesian island of Yap, the stones of Paradise are still considered valuable today. Source: Getty Images
The transmission of messages encoded with secret keys existed long before modern times. But only after the invention of the asymmetric crypto system, one of the most important technical prerequisites for the blockchain was created. Previously, the sender and recipient needed a shared key or password to encode and decode the message. An asymmetric system, on the other hand, is based on the principle of public and private keys. Here, the sender encodes his message using the recipient’s public key. The recipient can then decrypt the message using their private key.
The most popular method using this system was developed in the 1970s by Ronald L. Rivest, Adi Shamir and Leonard M. Adleman and was named the RSA method by their initials.
Further cryptographic breakthroughs during this period were achieved by the scientist Ralph Merkle. Using its Merkle tree, a set of hash values can be combined into a single value according to a tree diagram. This method is used in blockchain mining to collect multiple transaction values into a test value. This is used to validate the corresponding data block.
eCash: the progenitor of digital money
The invention of RSA encryption allowed the creation of the first digital currency. In 1982, cryptographer David Chaum wrote the paper “Blind Signatures for Untraceable Payments”, in which he outlined his principle for eCash. The currency units here are the lines of code.
Unlike Bitcoin, the transfer is done centrally through an eCash provider, such as a bank. The client could create an online account, deposit and withdraw the necessary amounts digitally using eCash software. The coins can then be transferred to the seller. The seller’s money first enters his software, and then is automatically sent to his bank. The bank has a database in which all issued coins are stored. This ensures that the same coin will not be used twice.
To protect the user’s privacy, a blind signature based on RSA encryption is used when transmitting data. The coin is generated not by the bank, but by the client’s software. Then it is placed in a cryptographic “envelope”, which is sent to the bank. The bank sees only the monetary value, but not the coin itself. It charges the corresponding amount from the client’s account, checks with the help of digital printing exactly how much is in the crypto envelope, and sends it back. After unpacking the coin again, the buyer can spend the verified coin so that no one except the seller knows from whom it was received. eCash was released to the market in 1989 under the name DigiCash. However, the e-commerce boom came much later, which means that the first digital money did not have much success. In 1998, DigiCash went bankrupt.
Surety: proto-blockchain in the newspaper
In 1991, seventeen years before the appearance of the Satoshi report on Bitcoin, cryptologists Stuart Haber and Scott Stornetta first created a preliminary form of blockchain. Their method, which they introduced to the market under the name Surety, for the first time made it possible to make digital documents protected from forgery.
To do this, the client creates a hash value from the document that needs to be protected. This information is then transmitted to the server, which adds a time code and combines these two pieces of information into digital printing. The client can then use this print as a code to check if something has been changed in the document. If you shift at least one character, a completely different verification code is created — this is the nature of hashes.
Using the Merkle tree, Surety then creates a single hash value from all the print codes created in a week. The company has been printing this value in the advertising section of the New York Times every week since 1995. Thus, everyone can make sure that his documents, sealed with a guarantee, are protected from forgery.
Modern Bitcoin blockchains work on the same principle. Only the hash value from the collected transactions of the data block no longer needs to be printed, it is used for reliable communication with the next block.
And what’s next?
Blockchain technology can be traced far back in the history of digitization and cryptography. What’s interesting about Satoshi’s invention is that various innovations that didn’t really catch on contributed to the realized vision. The last decade has shown that with the help of blockchain, it is possible to make a revolution in value trading and data management.
New applications such as smart contracts and more advanced altcoins show that the technology is just beginning. The history of blockchain is just beginning. How long will it take before Bitcoin seems as strange to us as a giant Micronesian stone?