History of cryptocurrency
The emergence of Bitcoin
A year after the 2008 financial crisis, the pseudonymous Satoshi Nakamoto created Bitcoin.Bitcoin is a peer-to-peer version of digital money. It allows online payments to be sent directly between two parties without the need for an intermediary.
It was designed as a hedge against authoritarian monetary control. On Bitcoin’s ledger, Nakamoto placed a UK news headline referring to the ongoing financial crisis:
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
He implies that Bitcoin could be a solution to the flawed traditional banking system. Bitcoin was created when the world was plunged into a deep recession. The entire financial system was on the brink of collapse. Its purpose is to protect people's capital from irresponsible governments and central banks.
Later, Satoshi offered a little more detail on his reasoning for the project. He revealed an awareness of the instability of traditional monetary systems:
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted […] but the history of fiat currencies is full of breaches of that trust.”
Bitcoin was a novel proof-of-concept, and it worked. It showed that wealth can exist outside of government control.
“With its pervasive spread [...] cryptography is forcing the financial world to abandon old systems for new [...] much like the Internet has done to countless industries since the turn of this millennium.”- Nik Bhatia
We will discuss Bitcoin in more detail later.
What is cryptography?
Cryptography is the mathematical or computational practice of hiding or encrypting data.In simple terms, it allows secure messages to be sent between two or more participants. The sender encrypts or hides a message and sends this encrypted message to the receiver. The receiver then decrypts it to generate the original message.
It allows blockchains to complete transactions on a digital ledger, safely. There is also no need for an intermediary. (Think of a blockchain as an online list that records every transaction that ever takes place. We will discuss blockchains in more detail in Module 3). Cryptography is also used to confirm the authenticity of data.
Why is cryptography important?
Recent technological advances have made it easier to access data. Yet, while this may offer many benefits, it also has significant drawbacks. Information stored online is exposed to a host of threats. These include malpractice, bad actors and hacks.Cryptography offers a way to protect data from many risks through encryption.
Cryptocurrencies are built on the concept of cryptography. Satoshi Nakamoto posted the idea to a cryptography message board in 2009:
“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”
Cryptography allows blockchains to complete digital transactions safely and anonymously, without the need for an intermediary. It also enables “trustless” cryptocurrency transactions. This means that users don’t need to know anything about a person to complete a transaction with them securely.
What is a cryptocurrency?
Note that the term ‘cryptocurrency’ is misguided. Many cryptocurrencies are not currencies at all. ‘Crypto assets’ is a more appropriate term.A cryptocurrency refers to an asset that comes from a blockchain itself, such as ETH from Ethereum.
Different crypto assets have different use cases depending on their reason for development. Some coins are used for exchange, some have innate utility, and some are used for governance.
What is a crypto token?
A crypto token refers to an asset that comes from a protocol, such as LDO from Lido.In crypto, the word ‘token’ is used to describe digital assets that operate on another crypto’s blockchain. (This is the case with most decentralised finance tokens).
A token belongs to applications built on top of blockchains, like the Bitcoin or Ethereum blockchains. A cryptocurrency belongs to the blockchain itself, e.g. BTC and ETH.
Through this exploration of cryptocurrency's origins, the critical role of cryptography, and the distinction between cryptocurrencies and tokens, we gain a deeper understanding of the digital assets shaping the future of finance.
Next, we’ll look at blockchains - what they are and why they’re important.
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