Threats to our data in the ether-world parallel a more tangible threat that has dogged society for much of our modern history: the worth of money. 

The mechanisms of commerce traditionally have been defined by social contracts enforced by a central authority. The mint issues coins that ascribe a certain value to things, trade is regulated and, for the most part, people’s individual fortunes are secured. But who is to say if your coin is still valid if the rules change? You stockpile a treasure, and wake up one day to find a new governor prefers another coinage, and your amassed fortune is valueless.

“All money mankind has ever used has been insecure in one way or another.”  - Nick Szabo[5]

To find a solution to our internet problem, the cryptocurrency pioneers of the 1980s and 1990s began by first trying to solve our money problem. The hunt was on for a new currency that would be internationally fungible yet independent of the fortunes of the realm. 

The Quest for the Anti-Bank

The first step towards a decentralised currency system was to find a way to make the exchange of money anonymous again. 

Cash is a private exchange of a mutually-agreed value between two parties. Although you could withdraw cash from a bank, and the receiving party may in turn deposit the cash into another bank, the details of the purchase itself remain private. But with the rapid adoption of credit and debit cards, banks have quickly become repositories not just for our money, but also for data on how we spend our money. When we transact digitally using a debit or a credit card, our financial data is no longer private: we are entrusting the details of that exchange to our bank, the credit card company, and our friend’s bank.

A method for private digital transactions would mirror the benefits of cash, but with the speed and convenience of credit. 

In 1983, David Chaum introduced the first model for eCash, a digital payment system that retained the privacy benefits of cash. The eCash system allowed users to store bank-verified digital money on their home computer and to use that money to pay for goods or services from participating merchants. The new system was able to make the relationship between the withdrawal and payment transactions anonymous, achieving the same level of privacy as traditional cash transactions.[6]

But Chaum’s eCash system, along with similar schemes piloted during the mid-1990s by CyberCash, Digital Equipment (Compaq Computer), and IBM, fell short of the goal of an anonymous and decentralised currency system. To the consumer, the functional benefit of eCash was unclear. To the tech world, the system was still overly reliant on a central authority, since the bank remained singularly responsible for verifying each transaction. [7]

Meanwhile, a radical concept for the future of truly independent digital money was emerging. 

The Cypherpunks

Whereas Chaum’s eCash sought to transform fiat money into digital cash, the pioneers of cryptocurrency were pushing an even more revolutionary idea: to create a fungible currency for a purely digital community, de-linked from any federal monetary system. 

 “A community is defined by the cooperation of its participants, and efficient cooperation requires a medium of exchange — money — and a way to enforce contracts. Traditionally, these services have been provided by the government or government-sponsored institutions and only to legal entities… I describe a protocol by which these services can be provided to and by untraceable entities.” - Wei Dai, 1998

In a seminal essay published in 1998, Wei Dai, an intensely private computer engineer associated with Microsoft, described an anonymous cryptocurrency system backed by a distributed peer network that could facilitate both the creation and the exchange of digital ‘b-money’.[8]

Dai was a member of the Cypherpunks, a loosely-organised community of digital privacy advocates committed to realising the ideal of a decentralised and anonymous monetary system. Counted among them were Adam Back, Hal Finney, and Nick Szabo, who also briefly worked with Chaum at DigiCash, the successor to eCash. Building on each other’s innovations, the Cypherpunks contributed essential pieces to the puzzle of a fully-realised cryptocurrency.[9]  

The foundation for Dai’s currency system was proposed by Adam Back a year earlier, in 1997, through a modification of the cryptographic principle of Hashcash. 

Hashcash was conceived in 1992 by Cynthia Dwork and Moni Naor as a means to cryptographically secure email messages. The programme appends a difficult-to-solve but easy-to-verify mathematical puzzle to the header of an email. The puzzle must be solved prior to sending the email, and solving it proves the sender has enough interest in the message being delivered to take the time to complete the puzzle.

Back’s modified interpretation of Hashcash applied the same principles but used the puzzle as an incentive rather than a deterrent. According to Back, users could earn digital currency by solving the hash puzzles appended to pending transactions, earning at a rate corresponding to the time required to solve the puzzle. Worth is proportional to effort: a gold bullion is more valuable than a penny because it is harder to make. 

Dai theorised a mechanism similar to Back’s Hashcash in his concept of b-money, a currency that could be created by anyone with a computer. 

“Anyone can create money by broadcasting the solution to a previously unsolved computational problem. The only conditions are that it must be easy to determine how much computing effort it took to solve the problem and the solution must otherwise have no value, either practical or intellectual. The number of monetary units created is equal to the cost of the computing effort in terms of a standard basket of commodities.” - Wei Dai, 1998

Still, Dai’s proposal lacked the technical details to implement his theory. Without the means to turn idea into reality, interest in the pursuit began to wane. By the early 2000s, most computer programmers had given up hope on the Cypherpunks’ dream for a cryptocurrency utopia.