Weekly Market Update - Friday, June 30, 2023

The Origins of Bitcoin

(originally posted April 28)

With continued interest in the potential of a bitcoin ETF, today we resurface our discussion of the origins of Bitcoin. Most of us think of Bitcoin as the original cryptocurrency, as it spawned an entirely new asset class. While its impact on the financial system and the wider world has been profound, there were a few much lesser known precursors that laid the foundation for the crypto universe. Today, we look back to the roots of Bitcoin. To read more deeply about this topic check out this article on Cryptopedia authored by our founders.

What came before Bitcoin?

Bitcoin has played a unique role in creating a movement to decentralize existing, centralized financial services, but it was not the first attempt at creating digital money.

The notion of scarcity with respect to digital money was famously envisioned by Nick Szabo when he proposed Bit Gold in 1998. B-Money, another conceptual precursor to Bitcoin proposed by Wei Dai, a computer engineer, Cypherpunk, and cryptographer, arose around the same time and is referenced in the Bitcoin whitepaper.

Going even further back, the idea of building cost (or digital scarcity) into a system using proof of work (PoW) was first conceptualized by Cynthia Dwork and Moni Naor in 1993 as a way to protect Internet services from abuse such as spam. In 1997, an English Cypherpunk named Dr. Adam Back implemented this concept into his project Hashcash, a service aimed at limiting spam and denial of service attacks by requiring a sender to generate a Hashcash token by solving a PoW puzzle.

Read more about Bitcoin’s precursors here.

Together, Bit Gold, B-Money, Hashcash, and other early examples of digital money and consensus mechanisms set the stage for Bitcoin.

Bitcoin arrives on the scene

The Bitcoin white paper was published by the mysterious Satoshi Nakamoto in 2008 and the network launched in January of 2009 upon the mining of the “Genesis Block” — the first block of the Bitcoin blockchain. Bitcoin created a digital currency that operates in a fully-decentralized, trustless manner that allows users to send monetary value to each other through the Internet without the need for trusted, financial intermediaries.

This was made possible by a major breakthrough in its PoW consensus mechanism. Instead of relying on a majority of nodes (known as “miners”) to reach consensus, Bitcoin relies on the majority of hashrate — the network’s processing power — to reach consensus.

Read more about PoW here.

Acquiring a majority of the network’s hash rate is expensive, making it costly for a miner to tamper with the ledger. Moreover, in doing so, a dishonest miner would forgo the handsome bounties of newly minted bitcoin (known as the “block reward”) that are awarded approximately every 10 minutes to the “winning” miner who correctly solves the PoW puzzle. Therefore, it is assumed that a rational, economically-motivated miner will commit her processing power toward securing the integrity of the blockchain instead of trying to manipulate it and cheat the system.

This incentive structure has turned digital money, a movement once made up predominantly of computer scientists and cryptographers, into an increasingly mainstream phenomenon.

Check out more about the history and culture of Bitcoin, its technical structure, and how it's secured by the blockchain.

See you next week. Onward and Upward!

Team Gemini

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