What was the digital currency before Bitcoin?

27 May 2021
Bitcoin wasn’t the first attempt at digital cash. In fact, it’s just the latest in a long line of projects to bring money into the computer age. It was, however, the first to do so successfully and has now outlasted all other solutions.

Luno has taken a look back at the best-known digital cash projects to find out how and why Bitcoin rose to the top. Will it stay there?

Where did digital currencies begin?

The first man to posit the idea of digital cash was American cryptographer, David Chaum. In 1983, Chaum published a paper titled Blind Signatures for Digital Payments, in which he proposed using a form of a cryptographically-secure digital signature to enable digital money.

It wasn’t until 1989 that Chaum actually put his theory into practice, though, when he created “DigiCash”. Unfortunately, DigiCash was launched prior to e-commerce taking off and the concept never really gained any traction. There were also a number of rumours about friction within the team and significant cash flow problems. The company ended up filing for bankruptcy in 1998 just as early online shoppers were flooding in, with those first through the door to the brave new world of the internet unwilling to embrace too much new stuff and preferring the familiarity of credit cards.

Why didn’t other digital currencies last?

It was a similar story for other early attempts to create digital cash. In 1997, British cryptographer Adam Back came up with the idea for “Hashcash”. Originally created to prevent email spam and other cyber attacks, Hashcash used a similar consensus algorithm to verify and process transactions that Bitcoin uses today. It never really made it from theory to practice, but the ideas it proposed have been central to digital cash as we know it.

Then there was “B-money”, which was developed in 1998 by computer engineer Wei Dai. B-money also helped lay the groundwork for modern-day digital currencies, though again unfortunately without being successful itself. Dai described B-money as “a scheme for a group of untraceable digital pseudonyms to pay each other with money and to enforce contracts among themselves without outside help.” Sound familiar? B-money also never actually officially launched and only ever existed as a proposal.

Computer scientist Nick Szabo got a bit further. In 1998, he proposed “Bit Gold”, which bears many similarities with crypto as we know it today. Indeed, some have speculated Szabo was actually behind Bitcoin, though these suggestions have been largely debunked. Unfortunately, Bit Gold’s most crucial issue was its inability to solve the double-spend problem inherent in digital cash – a problem common to these early incarnations of digital cash and one that Bitcoin was eventually able to solve.

What makes Bitcoin so popular?

It wasn’t until 2008 that a lasting digital cash solution finally emerged: Bitcoin. Bitcoin solved many of the problems that prevented other digital cash projects from seeing success. It stormed onto the scene and has been growing ever since.

Today, there are over 100 million bitcoin wallets with positive balances, and the number of active daily bitcoin wallets has reached an average of 1 million. Its market cap recently tipped over the $1 trillion milestone – bigger than Visa, Mastercard and PayPal combined. Major institutions have been getting in on the action too. Companies like Tesla, Square and MicroStrategy have all added bitcoin to their company’s balance sheets.

Bitcoin’s success can be put down to two key factors. For one, the ingenuity of the technology. For one, Bitcoin solved the double-spend problem – the risk that a digital currency can be spent twice. This was a key factor in the downfall of earlier attempts to create a digital currency. It’s also decentralised, which means no one person or entity controls its supply or issuance.

This is key to part two of its success: simple good timing. Bitcoin is money with a philosophy, and its release couldn’t have come at a better moment, arriving at a time when the ability of governments and central banks to act as custodians of our money was facing serious questions.

By 2008, US banks were paying the price for years of bad practice – risky loans, subprime mortgages, and outright fraud had consumed the system. In an attempt to prop up the system, the government used taxpayer money to bail out the banks. Unprecedented customer dissatisfaction followed, with people’s faith in the government and banks to adequately perform their functions was shattered.

The climate was ripe for Bitcoin – an entirely new financial ecosystem that offered an alternative, one that avoided the need to rely on human fallibility. The crisis shone a light on the elephant in the room. It caused people to ask: “who controls our financial system?” Bitcoin gave back that control.

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Byron Goldberg is the Australian Country Manager for Luno, the cryptocurrency wallet platform, joining Luno in late 2019.

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