Blockchain technology – history matters (Part 1)

How we got to where we are today

Hi all,

You have found lots of articles explaining blockchains and cryptocurrencies from a technical standpoint? We’ve had the same problem. It’s not easy to find articles putting all of this into a broader picture.

That’s where this piece should come in handy. And because it would be a bit much otherwise, we decided on two separate posts.

So what’s up?

This is our first of two articles briefly explaining the history of blockchains from the 1970s until today. Today, we’ll look at:

  • The early years (it all started before the internet)

  • Bitcoin comes along (blockchain-based money outside of government control)

In our next post, we'll look at more recent developments – starting with the launch of Ethereum in 2015.

Let’s get started! 🤓

You have probably heard the term blockchain. And like most people, you may think that it's just another one of those IT buzzwords – unless you think it's a synonym for cryptocurrencies which have an even worse reputation. However, that's not quite the whole story.

We believe in the potential of blockchain solutions for a broad range of enterprise use cases. We also think that it will probably take a while until they are widely used.

Do you remember the state of cloud computing in 2005? That was the year before Amazon Web Services launched. Today, that part of Amazon generates revenues north of $20 billion – per quarter. And while that's a big chunk of market share, it's still just one company.

Blockchain tech has similar opportunities. Whether it will make good on its potential is a separate question. Before answering it, it's useful to know a bit of context. Just like in any other area, history helps to predict the future.

The early years

Blockchains are not a particularly recent invention. Academic research on the foundations of blockchains started in the 1970s. In 1982, computer scientist David Chaum got his PhD at UC Berkeley in the United States. His dissertation included almost all elements that were used to create Bitcoin almost three decades later.

Considering that the internet as we know it today would only be opened to the public in 1991, it's hardly surprising that blockchain technology did not get any commercial traction at the time. That didn't stop Chaum from inventing secure digital cash (which also didn't become a commercial success) and conducting pioneering work on zero-knowledge proofs which are finally gaining traction today (more on those below and in future newsletters).

Another vital part of academic research was published in 1991, written by Stuart Haber and W. Scott Stornetta. They described a system which included timestamps for digital documents, allowing users to verify that these documents were authentic.

As you may imagine, the technical details are a bit complex (read this article for a concise summary). Unfortunately, their research was published too early. It solved a problem that didn't really exist at a time when the overall number of digital documents was still limited.

There is an interesting sidenote to these early versions of blockchains. Most research efforts were closely linked to cryptographic methods which were a highly controversial topic in the early internet days.

In the US and several other Western countries, governments tried to limit public access to strong cryptography. Until the mid-1990s, cryptography software was even classified as a munition in the US for obscure legal reasons. The very practical outcome: potential exports were severely limited. This only changed during the so-called 'Crypto Wars', an episode of tech history that is largely forgotten today.

Cryptography, however, didn't just enable some weird cryptocurrencies. First and foremost, it was vital in shaping our online behaviour. Have you ever ordered something online and paid with your credit card? Then you have used cryptography in practice.

Bitcoin comes along

The context of the Crypto Wars is not merely a nice little anecdote. Western governments did not just simply change their stance on cryptography. They had to be pushed, partly by the cypherpunk movement which started growing in the early 1990s. It included senior representatives from tech companies and well-known scientists who, in a nutshell, wanted to create software that helped to defend privacy.

By and large, cypherpunks didn't want to rely on governments, corporations or other organisations. With the internet in its infancy, such concerns were hardly a mainstream topic. General scepticism of governments and other large institutions, however, would remain an important theme. Creating a currency that does not depend on central banks or other central authorities was therefore just another step rather than a revolutionary idea out of nowhere.

Several computer scientists made first attempts in the late 1990s but these remained a niche topic in academia. Additional research alone probably wouldn't have made a significant difference in terms of adoption. The financial system was hardly perfect but few people would have wanted to trust a radically different and completely decentralised monetary system.

When American banks started to get in trouble in the summer of 2007, perceptions started to change.

Problems in the US quickly spread around the world. The fallout from the Global Financial Crisis led to protests and riots in various countries. Trust in banks deteriorated, the era of free money was about to start with interest rates at or below zero. It was the perfect time to launch a new kind of currency that did not rely on a central authority.

Bitcoin was introduced on 31 October 2008 through a largely technical paper. On 3 January 2009, the bitcoin network was launched. By 2012, the number of transactions per month exceeded one million, indicating the growth potential. At the same time, the lack of regulation – which was the main attraction for most early users – limited widespread adoption.

Governments had no incentive to regulate a currency outside of the control of any nation-state. Meanwhile, the bitcoin community had no desire to be put under any form of centralised government controls.

Coming up

In our next post, we'll look at more recent developments – starting with the launch of Ethereum in 2015. Don't miss it!

One more thing: Feel free to subscribe so that you’ll get our content as soon as it’s ready. We’ll really try not to be boring.

That’s the end for today! 😢

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