People still refer to Bitcoin as “new” – yet Satoshi Nakamoto published his white paper on the digital currency in 2009. Apple announced the iPad in 2010 – no one would describe it as new today. A device that was bigger than a smartphone, but more agile than a laptop is now considered to have been an inevitable technological evolution. At the birth of the Internet, it was assumed a secure, digital currency would follow.
Let’s go back to 1999:
“I think that the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but will soon be developed, is a reliable e-cash. A method whereby, on the Internet, you can transfer funds from A to B, without A knowing B or B knowing A.”
– Milton Freedman, American Economist and Nobel Laureate, interview conducted by the National Taxpayers Union Foundation.[i]
But a secure digital currency system had to overcome two significant obstacles. Firstly, information stored digitally can be replicated indefinitely – how do you prevent users from duplicating their money? Computer science refers to it as “The Double-Spend problem”.
Secondly, currency must be stored securely to prevent theft, yet backed up independently to avoid loss in the event of hardware failure.
The first attempt was “DigiCash”, created in 1992 by cryptographer, David Chaum. The system used a concept called ‘blind signatures’ to guarantee the anonymity of its users – but a central company or bank was needed to ensure each unit wasn’t spent twice.
By the mid 1990’s several private companies created electronic cash systems, focused primarily on facilitating online cashless transactions. Others including First Virtual Holdings, Cybercash and a division of Microsoft significantly invested in developing digital cash solutions. At the time, the use of credit cards to make payments via the Internet was rare and these efforts were seen as critical in enabling e-commerce.
But all these systems could not overcome the primary obstacle – they needed a trusted middleman to keep track of everyone’s transactions. Most companies could not gain that trust: consumers and banks did not want to invest in a system that had a single point of failure and could collapse overnight.
Digicash faced new challenges when it tried to meet the various national regulatory requirements. Regulators would not allow anonymity – mechanisms needed to be constructed to enable law enforcement to trace money to prevent money laundering, which undermined one of the primary advantages of e-cash. These impediments caused Digicash to declare Bankruptcy in 1998. Gold and Silver Reserve Inc., which maintained a gold-backed digital currency called e-gold was shut down. Its proprietors were indicted by the US Department of Justice for violating money-laundering regulations.
Ultimately the challenges and regulations led companies to abandon the concept. By the late 1990’s VISA and MasterCard had solved the technical difficulties required for secure online transactions. The benefits of a stand-alone digital currency were never realised. For a decade it seemed the idea of a purely digital currency was untenable due to the need for a trusted central party, which in turn was prone to failure due to legal or technical problems.
In 2009 a design for a practical digital currency that did not rely on a central third party was released: Satoshi published his white paper on Bitcoin. Bitcoin was not a company (or product of a company) but merely a set of rules – a protocol that dictated how digital transactions should be handled. Anybody could read the rules and follow them – no individual could own or change them.
Because Bitcoin has no central third party, it has no central point of failure. Complete anonymity of ownership and shared responsibility ensured no individual could be charged with money laundering. No individual or government can shut down the system – as long as one person in the world runs Bitcoin-mining software, the system continues.
Bitcoin solves Double-spend.
You can’t spend the same $20 note twice – nor can you double spend Bitcoin. If an individual attempts to send two consecutive transactions at once; one to a car dealer, another back to one of his wallets, when the blockchain attempts to update, it immediately identifies two identical transactions, orphaning one.
Bitcoin is trusted
For digital currency to be trusted it must be un-hackable. In 2011 Bitcoin faced its ultimate test from leading Internet-security researcher Dan Kaminsky[ii].
In 2008 Kaminsky famously discovered a fundamental flaw in the Internet which would have enabled a skilled coder to hack any website or shut down the entire Internet. Kaminsky alerted the Department of Homeland Security, executives at Microsoft and Cisco and worked with them to patch it.
When Kaminsky turned his attention to Bitcoin, he identified nine ways to compromise the system. When he launched his first attack, he immediately received the message, “Attack Removed.” Every attempt yielded the same result.
“I came up with beautiful bugs, but every time I went after the code there was a line that addressed the problem. I’ve never seen anything like it. Nakamoto understands economics, cryptography, and peer-to-peer networking. Either there’s a team of people who worked on this, or this guy is a genius.”[iii]
– Dan Kaminsky
A secure digital currency is not new, neither is Bitcoin. Like the iPad’s multiple evolutions, the evolution of Bitcoin Internet Protocols (BIP’s) has ensured its safe, secure platform is now trusted world-wide – with over eight million wallets created and an average of 250,000 transactions daily.
One might have previously argued that the concept of investing in Bitcoin as a portfolio diversification strategy was new. Yet now, even mainstream media, such as The Guardian discusses Bitcoin investment as an alternative to the “negligible returns” from old investment strategies. A logical evolution given its value has more than doubled in the past year.
What does the future hold?
Apple cofounder Steve Wozniak has joined Planet Capital, an investment banking firm exploring opportunities of emerging blockchain technologies.
Apple’s rumoured to be releasing a stand-alone Watch.
Shopping with Bitcoin on your iWatch appears inevitable.
[i] Barski, C & Wilmer C, 2015, Bitcoin for the Befuddled, No Starch Press, San Francisco.
[ii] Davis, J 2011, “The Crypto-currency”, The New Yorker, viewed April 14, 2016, < http://www.newyorker.com/magazine/2011/10/10/the-crypto-currency>.
[iii] Davis et al.
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