If someone sent you a message today saying “QWERTYUIOP”, you probably wouldn’t be all that impressed… But take things back to 1971 when Ray Tomlinson sent this as the first ever ‘electronic mail’ and you would have felt very different. In a similar light, the projects making the headlines in Decentralised Finance today might one day become commonplace, but until then, maybe they deserve the hype.
The early internet is about the only technology that can approximately size the impact that blockchain based technologies promise to deliver. As the internet revolutionised how information was stored and shared, many ‘pre-internet’ styles of work looked unlikely to survive. In the same way, blockchain based networks promise to upend decades of consolidation of power by the tech giants we know (and love?) today. Although comparable in the ambition of their goals (and perhaps hype created in the media) one notable difference between the old and new networks is the initial use case which they emerged from. The early internet promised unrestrained movement of information, while the blockchain revolution pitched itself on the promise of unrestrained financial freedom.
As early as 1982 there were movements towards a secure digital currency in the form of David Chaum’s paper, Blind Signatures for Untraceable Payments . Chaum developed the idea into one of the earliest attempts at what would be comparable to the cryptocurrencies of today, DigiCash. By letting both sender and receiver digitally sign and encrypt transactions DigiCash made it possible to anonymise transfers of cash, but it failed to achieve full decentralisation as the role of the bank still existed to handle the collection of funds.
While DigiCash failed to catch on at the time, it laid the foundations for a world where people could make secure digital payments between themselves. In the years that followed Chaum’s paper a number of factors combined which let people dream not only of securely sending money to each other, but to reshape the very network over which the money would be shared. They included:
Public availability of strong cryptography from the early 1990s
Ability to attain cheap computers powerful enough to compute many hash functions in a reasonable timeframe
Abundant access to the internet with increasing speed
Suddenly it became feasible that if enough participants were to coordinate, a structure similar to the internet, but without any reliance on a few dominant providers, or the need for central storage, could be created. If a financial tool which was secure like DigiCash could be hosted in a distributed manner on such a network, then the role of central banks could be removed entirely, but unfortunately so would any value of the transactions. If a decentralised cryptocurrency was to emerge, it would not only need to be self-sustaining technically, but also be valuable in the eyes of the public.
Although the task of generating real-world value for a completely new digital asset would be a complicated one, just putting the word ‘gold’ in its name was certainly not a bad place to start. Bit Gold, described by Nick Szabo in 1998, built on top of the encryption and secure transfer methods demonstrated by DigiCash but also solved the problem of generating itself value. Bit Gold was not initially intended to be a payment method or direct currency, but rather a reserve currency which could be used to regulate the distribution of other digital currencies.
Bit Gold’s value derived itself from the cryptographic proof known as ‘proof-of-work’ (POW) developed some years before by Moni Naor and Cynthia Dwork. POW, which was already used by spam protection software such as HashCash, meant that creation, or ‘mining’, of new Bit Gold would take roughly predictable amounts of computational power and therefore energy. This investment of energy to create new strings of Bit Gold meant that those who performed the calculations held difficult to attain items. These could then be perceived as valuable to people who wanted to trade scarce items similar to real world gold.
Given the fact that DigiCash existed over 15 years before Bit Gold, and the fact that Szabo was an active, well connected, member in the world of cryptography, it is interesting that Bit Gold never progressed beyond a few half-finished papers. Having come so close to creation it was not tested at scale in the real world and was almost unmentioned until it resurfaced in 2008. It’s hard to say why Szabo put the idea aside, but during the early 2000s he obtained a law degree from University of Washington with the intention of digitising contract law, something we’ll revisit later. Another possible distraction which may have delayed the first widely accepted digital currency was Szabo’s blog ‘Unenumerated’, which regularly published a bewildering set of articles covering everything from “Why are Green Beards Ubiquitous”, to “The Agricultural Consequences of the Black Plague”. A decade well spent, I’d say.
Just as Szabo resurfaced Bit Gold in 2008, the first sighting of what is todays largest cryptocurrency, Bitcoin, appeared. Bitcoin made a number of improvements which allowed it to be less susceptible to variations in computing power (an issue which would cause unpredictable inflation in Bit Gold), and also more secure in protecting itself from malicious actors trying to take control of the blockchain. Maybe the most notable improvement of Bitcoin was that it made it off the drawing board and into the public domain. Not only did Bitcoin give the world a decentralised financial asset which could be owned and traded anonymously, it also, fitting well with its original intention, gave the world an anonymous creator to speculate over.
The now infamous Satoshi Nakamoto takes credit for creating Bitcoin, and in a nod to their predecessors sent the first Bitcoin transactions to Hal Finny (a pioneer of cryptography and contributor to the improvements which Bitcoin made on Bit Gold), Nic Szabo, and Wei Dai (another prominent cryptographer who lends one of his names to a denomination of Ethereum, and the other to one of the world’s largest stable coins). With the first widely accepted digital cryptocurrency in use, it did not take long for the asset to begin to translate into conventional fiat value. And as with any new tech, there were a number of novel moments which made their way into folklore. One transaction remembered as “Bitcoin Pizza Day” is celebrated on 22nd May to commemorate the day a Bitcoin miner from Florida bought 2 pizzas for 10000 bitcoin, worth over $300 million today. But among the technical excitement and public scepticism there were people already beginning to ask, “well what next?”
With the lofty goal of connecting people across the world with an anonymously traded digital currency, un-corruptible by central parties nearing realization, attention moved beyond finance. Interest shifted from transparent connection of currency on a global scale, to transparent coordination of people on a project scale. The emergence of Ethereum, pioneered by Vitalik Butlerin in 2013, was the first step towards accommodating a layer of logic which would transform blockchains from a store of value into a decentralised machine capable of executing financial and non-financial actions.
The logic for applications was built into ‘smart contracts’ which could be deployed and publicly visible to all, but never edited in any way. This opened possibilities for people to code agreements which could be automatically executed if certain conditions were met, or if certain inputs were sent via a ‘transaction’. The flexibility of these contracts meant that people could code almost any set of transactions, including the creation of their own ‘currency’ or ‘token’ which could then be traded with others. Although Bitcoin did have basic smart contracts built in, it lacked the flexibility to create such elaborate code, instead focused on maintaining high security and compatibility with its existing transactions.
The openness of Ethereum to let creators loose to build ever more complicated interactions was not without its problems. As the desire to coordinate people rather than blocks of financial data grew, so did the potential that holes in the logic of smart contracts could be exploited. One of the earliest large profile projects on the blockchain was The DAO a “Decentralised Autonomous Organisation” with the goal of crowd funding for the Ethereum Foundation. The visibility of the source code meant a bug could be easily seen and exploited, and the inability to alter the code left The DAO suffering over $50 million in losses which caused long lasting consequence on the Ethereum blockchain.
Despite some early setbacks, Ethereum led the way for future DAO projects which were increasingly used to shift real world decision making on chain. From crowd funding projects, to organising protocols by transparent voting mechanisms, the role of smart contracts has revolutionised how organisations form, reach decisions, and interface with the public in the same ways the early internet changed how information was presented and shared across the world.
Whether the decentralised and secure nature of blockchains today can hold up against impending regulation and the challenges of scaling to accommodate the next wave of adopters remains to be seen. It will depend on the builders across every blockchain, protocol, or application. But if those builders are anything like Chaum who wrote a seminal paper on digital currency on a typewriter, Vitalik who recovered the Ethereum foundation from a $50 million hack, or Szabo who managed to master cryptography, contract law and the complex world of green beards, they might just be good enough to make it happen.
