Building blocks of crypto — an overview, Pt. 2

In Part 1 — we talked about how the current banking system has several shortcomings. This became pretty apparent over the years. A quest for digital money happened over several decades — and this started earlier than most of us think.

Bitcoin was not the first digital currency to exist — there had been many other attempts at it before, many ideas of which eventually Bitcoin built upon.

Early attempts at a Digital Money

DIGICASH, 1990

Image Courtesy chaum.com [1]

In 1983, David Chaum, a leading cryptographer, introduced the concept of digital money. He started a company called Digicash in 1990 — which unfortunately ended with bankruptcy 8 years later.

An excerpt from a NYTimes article from Oct 1994 [2]

EGOLD, 1996

E-gold was another company that was started in 1996 by Dr. Douglas Jackson and Barry K. Downey [3] . It allowed for instant transfers of gold ownership on the internet. However, it had to suspend operations due to legal issues.

THE DOUBLE SPEND PROBLEM

Ref. — BitcoinWiki [4]

These attempts failed largely due to “centralized points of control”. However at the time, this could not be avoided, as the “double spend problem” had not been figured out yet.

The double spending problem is what happens when a single unit of currency is spent simultaneously more than once. If you spend $10 to buy a sandwich, you should not be able to “re-spend” that money again. This seems pretty obvious with cash, but how would it be ensured with digital money? For example — note that any digital file that you have, like a doc file or an image file, can easily be copied multiple times. But that should not be the case with money, right?

Hence, central servers were needed to keep a track of these transactions in a central ledger — to know who was spending how much, and to ensure that there was no double spend.

A solution to digital money is found — when Bitcoin arrives

An anonymous person/entity called Satoshi Nakamoto published the Bitcoin whitepaper in 2009 — where he talks about a “distributed ledger”. This is essentially a “peer to peer” ledger, where everyone can agree on the history of the transactions, and on the current state of the ledger.

A snapshot of the Bitcoin whitepaper [5]

Because this is a “peer to peer” ledger — no centralized party controls the ledger anymore, making the system much more robust. This ledger is what is called a “blockchain”.

What the term “crypto” means in this context :- a system using cryptography, computer science and math to ensure that the digital money cannot be faked and to make sure a transaction record is real and immutable.

Key components of the Bitcoin network

Miners compete to solve complex mathematical problems, and the first one to solve the problem gets some bitcoin as a “reward”. This is how new bitcoins are “created” and enter into circulation; and this is also how new transactions are confirmed by the network.

Proof of work is a form of cryptographic proof in which one party (the prover) proves to others (the verifiers) that a certain amount of a specific computational effort has been expended. Verifiers can subsequently confirm this expenditure with minimal effort on their part. The verification is done without having to trust anyone and enables trustless consensus

Application-specific integrated circuit (ASIC) miners are computers that are designed specifically to mine cryptocurrency. This was necessary as mining difficulty increased over time. [6]

Bitcoin was just the beginning

Though Bitcoin was the first ever cryptocurrency, over time several “copycats” cryptocurrencies, or simply crypto tokens with utilities other than a currency popped up.

As of the time of writing this, there are around ~13,000 coins listed on the tracking site coingecko.com. And we can also note that BTC accounts for only ~40% of the total crypto market size. [7]

The total market capitalization of all coins is hovering at ~$1 trillion, so it’s not a small industry anymore. The next major cryptocurrency to appear was Ethereum, in 2015.

In the next part of this series, we dig deeper into Ethereum, and how it was a major building block for the industry. Stay tuned ! :)

References

  1. https://chaum.com/ecash/
  2. https://chaum.com/wp-content/uploads/2022/01/10-19-1994-Attention-Internet-Shoppers-E-Cash-Is-Here.pdf
  3. https://cs.stanford.edu/people/eroberts/cs201/projects/2010-11/Bitcoins/e-gold.html
  4. https://en.bitcoinwiki.org/wiki/Double-spending
  5. https://bitcoin.org/en/bitcoin-paper
  6. https://www.businessinsider.com/personal-finance/asic-mining?IR=T
  7. https://www.coingecko.com/

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