History of Cryptocurrency, Part I: From Bitcoin’s Inception to the Crypto-Boom
The Internet is one of the most underestimated inventions. At the very moment when it seems it has come to a point beyond which it can offer something new, the new appears.
The Internet is one of the most underestimated inventions. At the very moment when it seems it has come to a point beyond which it can offer something new, the new appears. It does not appear unexpectedly; it develops gradually. Suddenly, we realize that Wikipedia is the go-to source for information, we communicate using Skype, and without having to think about it, our computers no longer store our documents. We store them on
We start using a tool because it is interesting and promises something new. At some point, it becomes a part of our everyday life, and then it seems like it has always been there. I remember when I used to drive around the city using a paper map, and now I only use Google services. When did this happen?
Money started being ‘digitalized’ at some point. It evolved, drawing deeper into the net, until forms that are completely virtual appeared: cryptocurrency.
The transition from Visa and PayPal systems to cryptocurrencies, however, turned out to be more complicated than we thought. Traditional payment service providers and cryptocurrencies differ so much that some people cannot understand the essence of this new money and how it differs from the conventional fiat.
Just as with Internet services, cryptocurrencies are becoming more and more prevalent. New crypto services are created, shops and retailers start using them in their trade. It is only a matter of time until we will start taking cryptocurrencies for granted.
Cryptocurrencies have created a mythology of their own in the six and a half years of their existence. It includes entities like the aura of secrecy surrounding the personality of Bitcoin’s creator, Satoshi Nakamoto; the historical pizza, which cost enough to buy out a government of a small African country; the rise and fall of bitcoin’s exchange rate; the cautionary tale of Mt.Gox; the great thefts and lost millions on discarded hard drives. Each culture consists of such stories, but these stories are not the history.
In this first part, we will have a look at history of cryptocurrencies, from the creation of Bitcoin to the crypto-boom that started in 2013.
The Birth of Bitcoin: 2009-2010
January 9, 2009 was the date when Bitcoin 0.1 was released. Bitcoin releases 0.1.0 up to 0.1.5 supported only Windows 2000, Windows NT and Windows XP. Right after the first release, Satoshi went into polishing the client. He corrected some minor network and node communication errors, and worked on improving the client’s usability with a few associates (for example, they prevented entering your own address in the address book and added some explanation text to transaction details for generated coins).
Bitcoin release 0.2.0 appeared in December 2009, nearly a year later. It supported Linux, and the community became more actively involved in the development. In addition, this release was able to use the advantage of multiple processors to generate blocks. Until then, it only started one thread. If you have a multi-core processor like a Core Duo or Quad, this will double or quadruple your production.
Another big step forward is development of JSON RPC API so third-party services could also communicate with Blockchain and network.
During this time, Bitcoin was only known to a very small group of early adopters. In November 2009, a forum that was the progenitor of Bitcointalk appeared on bitcoin.org. This led to growing popularity of the currency. New people entered the online community; new ideas were created as teams formed on the spot to implement them.
This attracted not only praise, but criticism as well. When Bitcoin’s operating principles were analyzed, a few flaws were discovered. At the same time, the idea of transaction fees appeared, and people started discussing the traceability of bitcoins.
In the summer of 2010, the Bitcoin 0.3 was released. The number of users was growing along with the mining difficulty as well. At the same time, the idea of using one’s computer for mining more efficiently emerged. Using the graphic processor’s computational powers for mining was proposed as a solution. That summer, user ArtForz established an OpenGL GPU hash farm and generated his first Bitcoin block.
On August 6, 2010, a major vulnerability in the Bitcoin protocol was spotted. Transactions weren't properly verified before they were included in the Blockchain, which let users bypass Bitcoin's economic restrictions and create an indefinite number of bitcoins. On August 15, the vulnerability was exploited; over 184 billion bitcoins were generated in a transaction, and sent to two addresses on the network. Within hours, the transaction was spotted and erased from the Blockchain after the bug was fixed and the network forked to an updated version of the Bitcoin protocol. This was the only major security flaw found and exploited in Bitcoin's history.
More and more miners competed for the limited supply of blocks. Individuals found that they were working for months without finding a block and receiving any reward for their mining efforts. This made mining something of a gamble. To address the variance in their income, miners started organizing themselves into pools so that they could share rewards more evenly.
On November 27, 2010, the first Bitcoin Pooled Mining (BPM), better known as Slush's Pool, appeared. It operated on a share strategy that involved an artificially low difficulty method that has since been determined to be vulnerable to cheating. The idea of pool-mining has evolved since that time, but the basis remains: mining together is more profitable than mining solo.
In December 2010, user doublec compiled bitcoind for the Nokia N900 mobile computer. The following day, user ribuck sent him 0.42 BTC in the first peer-to-peer bitcoin transaction.
The First Experiments – 2011
At the end of 2010, Satoshi released the ‘farewell’ version 0.3.9 and left the project for good. This departure of the creator was not critical for the currency, as community took over the development. Bitcoin Improvement Proposal (BIP) was established to increase the efficiency of communications within the community. This is the standard way of communicating ideas since Bitcoin has no formal structure. The first BIP (BIP 0001) was submitted by Amir Taaki on August 19, 2011, describing what a BIP is.
By that time, many notions about how to improve Bitcoin appeared, but not all of them could be implemented. Thus, some people from the community started their own projects. The first idea to be implemented was the one concerning binding Bitcoin to the DNS system, which led to creation of Namecoin. After that, developers started experimenting with block time, block reward, maturity period and other parameters, and GeistGeld, iXcoin, SolidCoin and others were created as a result.
Since Bitcoin’s difficulty continued rising, people began migrating to FPGA and GPU farms. The public became concerned about the flaws of SHA256, which opened the door leading to new experiments.
The first coin to abandon SHA256 was Tenebrix, ‘cryptocurrency with solid GPU resistance.’ The proof of work (PoW) for this coin was based on а scrypt. The algorithm, which appeared in 2009, was designed as a password-gen function, but never became popular. The GPU miner for scrypt appeared very soon afterwards.
A bit later Litecoin was developed and was welcomed by the community with more enthusiasm than Tenebrix, which had pre-mine. Litecoin was mined with CPU, leaving GPU for the more expensive Bitcoin.
In summer of 2011, the Proof-of-Stake principle appeared as a reaction to unequal distribution of ‘voting power.’ Instead of your ‘vote’ on the accepted transaction history being weighted by the share of computing resources you bring to the network, it's weighted by the number of Bitcoins you can prove you own using your private keys. A year later, PPCoin (Peercoin) appeared with a hybrid proof-of-work/proof-of-stake.
This period is also noted for the start of mobile development. In July 2011, Bitcoins Mobile, the first Bitcoin application for iPad, was released by Intervex Digital. The P2Pool, the first P2P decentralized pool emerged (in August 2011), as well as “An Analysis of Anonymity in the Bitcoin System,” the beginning of the first serious research on Bitcoin’s anonymity. Mike Gogulski operated the first ‘Bitcoin Laundry.’
ASICs appeared in the summer and autumn of 2011, playing a part in destabilizing the mining process. The problem with ASICs, however, is the resulting consolidation of processing power in the hands of individuals, which is antithetical to the philosophy of Bitcoin itself.
The idea that computational powers can be used for some valuable calculations became the basis of Primecoin (2013), which sought out prime numbers during the mining process.
Ripple also appeared in 2011. Ripple was first implemented in 2004 by Ryan Fugger, a web developer from Vancouver. In 2005, Fugger began to build Ripplepay as a financial service to provide secure payment options to members of an online community via a global network. By that time some people realized that Ripple, as an idea of chain-exchanging IOUs, can both take the best from cryptocurrencies and solve some of their issues (reliance on centralized exchanges, high use of electricity, and slow transaction times). This led to the development by Jed McCaleb of a new Ripple system in 2011.
Concurrently, in May 2011, McCaleb began developing a digital currency system in which transactions were verified by consensus among members of the network, rather than by the mining process used in Bitcoin.
By the end of 2011, the BIP 0010 Multi-Sig Transaction Distribution was released by Alan Reiner. A multi-signature transaction is the one that sends funds from a multi-signature address, which is an address that is associated with more than one ECDSA private key. The simplest type is an m-of-n address, which is associated with n private keys, while the sending of bitcoins from this address requires signatures from at least m keys.
This proposal was implemented and tested in the older versions of Armory Bitcoin software for use in offline-wallet transaction signing. On March 30, 2012, multi-sigs were added to Bitcoin.
Development of Infrastructure – 2012
At this point, the Blockchain size became an issue and solutions to optimize it without losing important data were proposed.
In April 2012, Pay-to-script-hash (P2SH), as defined through BIP 0016, went live. P2SH was developed in order to transfer the responsibility for providing conditions required to redeem a transaction from sender to redeemer of the funds. The benefit lies in allowing a sender to fund any arbitrary transaction, no matter how complicated, using a fixed-length 20-byte hash that is short enough to scan from a QR code, or easily copied and pasted.
As the community grew, specialists from related fields joined the Bitcoin community, including economists, scientists and lawyers. Moreover, developers specializing in different programming languages also came onboard. This resulted in developing the BicoinJ. For Java developers, BitcoinJ was an entry point to developing applications that interact with the Bitcoin network.
By 2012, it became apparent that Bitcoin had too many principal setbacks, so some developers started working on currencies that would eliminate these issues. This was the year when the CryptoNote technology appeared. It uses ring signatures and one-time keys for conducting transactions, thus making them untraceable. Moreover, a different PoW principle made cryptocurrency ASIC-resistant. Bytecoin, the first cryptocurrency based on this new principle, also appeared in 2012. The currency initially garnered mostly academic attention due to its complex cryptography. Universities were the places where early CryptoNote forks appeared.
In August 2012, Jed McCaleb hired Chris Larsen and they approached Ryan Fugger with their digital currency idea. After discussions with McCaleb and long-standing members of the Ripple community, Fugger handed over the reins. In September 2012, Chris Larsen and Jed McCaleb co-founded the corporation OpenCoin.
OpenCoin began development of the Ripple protocol (RTXP) and the Ripple payment and exchange network. Of the 100 billion units created, the creators themselves, seeders, venture capital companies, and other founders retained 20 billion XRP. The remaining 80 billion were given to Ripple Labs.
In autumn 2012, the majority of the Bitcoin community focused on developing and improving the wallets. The idea of deterministic wallets appeared as early as in 2011. On November 5, 2011, Electrum appeared – the first lightweight Bitcoin client, based on a client-server protocol. In 2012, the goal to create a convenient and secure wallet was realized. This was the period when light browser-based wallets started to appear along with cold storage (the wallet is stored offline) to simplify the process of migrating and backing up data, as well as paper wallets that allowed storing a couple of keys on a piece of paper, and even physical Bitcoins that stored the keys in a nice wrapping.
The year 2012 prepared the grounds for the subsequent altcoin boom. The following year, 2013, would be very fruitful, with all revisions of Bitcoin’s foundations, and developers constantly searching for new ways of developing the cryptocurrencies. That year, Primecoin was developed, its PoW based on discovering the prime numbers. In 2013 CryptoNote’s core, originally developed in Java, was re-written in C++ and a few forks of it appeared. Dogecoin was also developed, which got spread thanks to image-boards, with all its forks. Quark appeared, which experimented with multiple Hash-algos. As earlier mentioned, Peercoin, the first cryptocurrency with PoS, also was created in 2013, as well as its forks. Beside it appeared NXT, another PoS currency with a brand new operating algo different from that of Bitcoin. And of course Ripple development continued.
The year 2013 involved a complete revision of Bitcoin’s principles. Brand new cryptocurrency-building technologies appeared and became popular, and that lead to the rise of new leaders. Naturally, Bitcoin as a standard-bearer holds the first place by a landslide, but there are alternatives. The second part of the article will provide more information on this subject.
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