In order to fully understand modern cryptocurrencies, however, one needs to dig deep into the rich history of the various attempts to realize digital money.
That’s because cryptocurrencies today are best described as “combinatorial inventions,” ones that create a new technology using only a combination of older, established works.
At the root of all cryptocurrencies today lies cryptography, the techniques used for secure private communication, and encryption, the process of encoding that information.
What is cryptography?
Cryptography is the science behind creating codes and cyphers that allows people to transmit information in a private and secure way.
The earliest forms of cryptography can be traced back to certain ancient civilizations, a famous example being the use of symbol replacement in Egyptian writings.
However, cryptography has been developed extensively since then and has undergone many iterations to adapt to the times. For example, in the middle ages, messages were encoded using two alphabets, with readers needing access to both to decipher the messages.
In the early 1900s, cryptography was mainly used by the military and spy agencies, particularly during war, where secret communications were a vital way to send information between posts. One of the most famous early 20th century cryptographers was Alan Turing, who built a machine that helped decrypt german messages during WW2.
Today, the method that secures cryptographic transmissions when they are in transit from one party to the next, particularly over the internet, is called encryption.
In modern day cryptography, information, or data, can be signed with a private key, and, much like in the earlier days, third parties can verify the message’s signature.
Digital signatures are often used to protect the integrity and authenticity of communications and for making the transitioning data immutable. In order to create and verify signatures, users rely on a set of keys, private and public.
Cryptocurrency networks use digital signatures to enable the transfer of crypto-assets. The recipient provides their public key to the sender, and the sender’s private key signs a transaction assigning the asset to the recipient’s public key.
Hash functions are another feature native to cryptography, and are essential to mining, a way that some cryptocurrencies, like Bitcoin, secure their distributed network and regulate the release of new monetary units.
Hashing is a mathematical process that takes an input of data information of any size and produces a fixed size output. In order to propose blocks in the Bitcoin protocol, computers race to generate hashes until one of the hashes has a small enough value.
The winning hash is broadcasted to other computers for them to verify whether the solution is true or not. If it is true, the user who broadcasted the block is awarded new Bitcoin.
Digital signatures and hashing are also key technological assets behind many previous attempts at creating digital cash and are widely used in many cryptocurrencies.
Bitcoin by Satoshi Nakamoto
Under the pseudonym Satoshi Nakamoto, a programmer (or group of programmers) published the whitepaper “Bitcoin: A Peer-to-Peer Electronic Cash System.”
Instead of relying on a centralized server or database to house information on transactions, accounts and balances, Bitcoin relied on its own network of users to provide that service.
In early 2009, the first bitcoins were mined, leading to the growth of the cryptocurrency ecosystem we find ourselves in today.
If you would like more information on how Bitcoin works, feel free to read our ‘What is Bitcoin?’ guide, which offers a more extensive breakdown of its technology and vision.