A decade ago, we might have heard Bitcoin. However, many might have dismissed it as a scam. Today, Bitcoin is still here, whether we believe in it or not. But what led to the birth of Bitcoin? Several ideas, principles, and innovations that were proposed decades back, had finally paved the way for the birth of Bitcoin. 

Galt’s Gulch

In 1957, Ayn Rand wrote a novel titled “Atlas Shrugged.” The novel shared a story where the main character, John Galt, attempted to disrupt the bureaucratic society by retreating to a secluded place where creative individuals can live, pursue their innovations, and work according to their own set of principles, free markets, and no interference from a centralised authority. Similar ideas were expressed in an essay titled, “Galt’s Gulch in Cyberspace” in 1997 by Tim May. The above philosophical ideas and principles had a massive impact on the rise of cypherpunks in the late 1980s and early 1990s with its ethos of privacy and freedom. It is through this cypherpunk movement that the decentralization concept became central to Bitcoin. 

Austrian School of Economics 

In 1892, Carl Menger, founder of the Austrian School of Economics  wrote a book titled “The Origins of Money.” The author expressed that money did not grow from the creation of the state or an agreement among citizens. He asserted that money has emerged from the self-interested actions of individuals, who prefer indirect exchange more advantageous than direct exchange. These self-interested actions of individuals depict that money originated not from the top-down decree which very much aligns with Bitcoin’s ultimate goal of decentralisation. Some earlier cypherpunks expressed that Bitcoin is the modern manifestation of Carl Menger’s theory of money. 

Further, the Austrian School of Economics is against inflationary monetary policies like increasing the money supply to stimulate economic growth. It is this skepticism against the inflationary monetary policies that led to the capping of Bitcoin to 21 million.

Public Key Cryptography

In 1976, Whitfield Diffie and Martin Hellman introduced the concept of public key cryptography. It was their concept that later become the foundation of cryptographic protocols and systems. Public key cryptography is used in Bitcoin to create a key pair simply for the controlling of access to funds. The key pair are public and private keys, and while the former is used to receive Bitcoin, the latter is used to sign transactions to spend the Bitcoins. It is through this cryptography that information encrypted with one key can only be decrypted by another key in pair, which then contributed to secure communication and data exchange over the network.

The Bitcoin wallet has a key pairs collection of private keys and a public key. The private key is picked at random. From private key, public key is generated using one-way elliptic curve multiplication. At last, the Bitcoin address is generated using a one-way cryptographic hash function from public key. 

Merkle Trees

In 1989, Ralph C. Merkle presented his paper on “A Certified Digital Signature” at the annual conference for research in cryptography. Their paper significantly contributed to the field of cryptography.

But what exactly is a Merkle Tree? A Merkle Tree is a type of binary tree that has a set of nodes at the bottom of the tree, called leaf nodes, and a single node at the top, known as the Merkle root. The leaf nodes represent individual transactions, while non-leaf nodes represent the hash of their child nodes. The Merkle root is a single hash that represents all the transactions, and hence, the whole gamut of transactions can be verified using this single hash. When volumes of transactions can be verified using single hash, the memory required to verify the data is less including the amount of data to be broadcasted across the blockchain network. With Merkle Trees, the transactions can be verified without the need to download an entire block.

Secure Time Stamping

In 1991, Stuart Haber and W. Scott Stornetta proposed a new idea in their paper, “How to time-stamp a digital document” in a Journal of Cryptology. Their proposal used a chain of hashes, similar to a digital fingerprint which enables the creation of a timeline every time changes are made to a set of documents. It ensures that the documents are not tampered with and every change is time-stamped and properly recorded in the chain of hashes. In the context of Bitcoin, each block has a list of transactions, and the blocks are connected using a chain of hashes, having timestamps, making it impossible to backdate or forward-date. Similar ideas were also proposed in 1993 by D. Bayer, S.Haber, and W.S.Stornetta, in their paper, “Improving the efficiency and reliability of digital time-stamping.” 

Byzantine Fault Tolerance and Proof of Work

In 1982, Leslie Lamport, Robert Shostak, and Marshall Pease introduced the concept of consensus in distributed computing and systems in a paper titled “The Byzantine Generals Problem”. The Byzantine Generals Problem involves a scenario where involved parties must agree on a strategy to avert failure. However, some parties could act maliciously, and the primary challenge lies in finding a protocol that enables all parties to reach a consensus. This concept became fundamental in the design of Bitcoin, where nodes in the network need to reach a consensus to avoid system failure, considering that some nodes can behave arbitrarily. 

In 1993, Cynthia Dwork and Moni Naor introduced the Proof-of-Work (PoW) as a measure to prevent denial-of-service attacks. PoW was designed to require the service requester to perform some work. This concept effectively prevents a single node from controlling the network and making unauthorized changes in the transaction ledger. 

The Precursors

In 1998 the cypherpunk Wei Dai and Nick Szabo introduced their ideas of digital currency, b-money, and Bit Gold. Their ideas were publicly disclosed only in 2005, according to Nick Szabo’s blog on “Bitcoin, what took ye so long?” While Dei Dai’s ideas and principles influenced the design of Bitcoin, the main precursor was the Bit Gold that Nick introduced. Bit Gold and Bitcoin have 90% similarities except that Nick’s idea of Bit Bit Gold did not solve the double-spending and did not flesh out the consensus mechanism. As Bit Gold and Bitcoin share same ideas, the stylometric analysis conducted by Aston Unversity, 2014, found striking similarities between Bitcoin’s white paper and those of the writings of Nick Szabo, mostly posted at his blog, ‘Unenumerated.’ A book, “Bitcoin, The Future of Money?” by Dominic Frisby had drawn the same conclusion.

Financial Crisis, 2008

The birth of Bitcoin can also be attributed to the global financial crisis, of 2008. Today, after more than a decade, Bitcoin is said to be a ‘multidisciplinary concept’ as it involves legal, computer science, finance, and economics.  A paper, “Shelling Out: The Origins of Money” written by Nick Szabo, provides a comprehensive history of the evolution of money, where ancestors used rare collectibles as a form of money. This rare resonates similar to the fundamental concept of Bitcoin which is forever capped at 21 million. The paper also highlighted about historic role of money as trust-minimizing exchange medium, which became the core aspect of Bitcoin. 

Conclusion

The concepts and innovations from the 1970s, 1980s, and 1990s, including the Byzantine Generals Problem, Proof of Work, Merkle Trees, the Austrian School of Economics, Secure Time Stamping, and Public Key Cryptography, ultimately paved the way for the creation of Bitcoin. Satoshi Nakamoto ingeniously integrated all of the aforementioned innovations, giving rise to Bitcoin. Without the contribution of these foundational technologies and the pioneering ideas of figures like Hal Finney, Nick Szabo, and Wei Dai, the evolution of money might have stalled in fiat currencies.

The rise of Bitcoin has been unstoppable, yet the underlying technology, which it is now referred as ‘blockchain’ holds massive transformative potential that can revolutionalise particularly the financial institutions. 

Contributed by

Pema Wangchuk

pemawangchug1986@gmail.com

Disclaimer: The views and interpretations expressed in this article are solely those of the author and information provided are based on author’s academic pursuit in the field of blockchain. Any misinterpretation or misunderstanding derived from the content is unintended.