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Crypto 101: How Did Bitcoin Come About?

Bitcoin didn’t happen overnight. The idea of a native currency for the internet was built-in to basic internet protocols. Ever heard of error 404? It’s a message you get when you visit a URL that doesn’t exist. What about error 402? That’s an error for insufficient payment. So what does that tell us? It tells us that in the 70’s, the writers of these protocols had a native currency for the internet in-mind. Way back in the 70s! They would explore this idea of a digital currency in coming decades. Which would ultimately lead to the creation of Bitcoin.

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The Origins of Bitcoin

So the next few decades were full of digital cash experiments. In 1989, David Chaum  wanted to create a form of centralized “electronic money” that utilized the same kinds of cryptographic protocols (like public/ private key cryptography) that support modern cryptocurrencies today. We won’t go over each of these projects in detail, but many do have something in common. All of these projects that have been put out in the 20 years that precede bitcoin have innovative components that would ultimately be part of the Bitcoin protocol.

The problem with these early digital currency projects was that they could not sufficiently put everything together, it was Bitcoin that did that. Many of these organizations were also centralized and easily shut down by the government. So why did many continue to be centralized? They stuck to central servers because they were good at avoiding one specific problem, the “Double-Spend Problem.”

The Double Spend Problem

The “Double Spend Problem” refers to the fact that digital goods are very easy to copy. This includes cryptocurrency. After all, it’s just code that makes up the Bitcoin network. Someone in possession of a digital token, even one that they manage with cryptography, can still copy that token rapidly and repeatedly. And what’s going to happen to the value of that cryptocurrency if someone floods the network with these “counterfeit” tokens? It’s not going to be valuable for very long if I can just create tokens out of thin air.

Making a copy of a digital coin and attempting to spend it more than once we call “double spending”. It was this specific problem that forced early digital currency systems to implement central servers that functioned as a clearinghouse or a master ledger. In this centralized system, if Alice wants to send one coin to Bob she can’t do so directly. Her transaction needs to be sent to the central server which can effectively deduct one coin from her account and credit one coin to Bob. The transaction relies on the central server for processing.

Satoshi Nakamoto

While many in the digital currency world attempted to address this issue, Satoshi Nakamoto was the first to find success. The concept behind Nakamoto’s solution is simple, instead of one server or entity keeping track of who has what coin at what time. The entire network does this work. Instead of one central server that maintains a master ledger, every computer running Bitcoins software has a copy of this public ledger of transactions, which they copy and shared among all the nodes on the network. Instead of one server determining who has what when, the entire network keeps track of it.

By integrating the components from early digital cash projects, bitcoin solved the double-spending problem that is the real innovation of bitcoin. What a black swan!

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