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Bitcoin’s Predecessors

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Bitcoin, like most innovative innovations, was not created in a vacuum.
Bitcoin was built by drawing from previous experiences and piecing
together various tried-and-tested concepts in an innovative way to come
up with new characteristics for decentralised digital cash.
Below are some technologies and ideas that may have directly or
indirectly inspired Bitcoin:
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 cypherpunk, 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
commercialise 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.
In November 1998, Wei Dai, an American-educated cryptography
researcher and cypherpunk, published a short paper111 describing bmoney
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.
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 ‘Hashcash’.
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 ‘Hashcash—A Denial of Service
Counter-Measure,’ describing improvements and applications of proofof-
work, including hashcash as a minting mechanism for Wei Dai’s bmoney
electronic cash proposal.
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 centralised 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 ‘ToStealEverything’ 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 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.
Centralised services and entities running those services are easy to shut
down, and so it was, to have its role replaced by BitTorrent, a
decentralised 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 focused on transaction privacy.
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 decentralised: 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
decentralised protocols are more resilient to being shut down than
services with a central point of control or failure. I expect the trend of
decentralisation to continue in the future, driven in part by concerns that
authorities are overextending their reach into private social matters.

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