On the surface (and certainly judging by the way its developments are covered), Bitcoin may seem like a surprising and new type of currency—one that only exists on the Internet, isn’t backed by fiat the way cash and coins are, is distributed among thousands of computers around the world, and is created by mining mathematical problems. While humans have been using some form of money since at least early Mesopotamian times, the emergence of cryptocurrency is admittedly different. But even though the digital and Internet-based aspects of Bitcoin and Ethereum are necessarily a product of the times, the concepts actually echo throughout ancient history, finding precursors in millennia-old civilizations.
The earliest ancestor: the ledger
Cryptocurrency transactions are recorded on the blockchain, which is a permanent digital ledger that is stored across computers, or “nodes,” all over the world. Every transaction—which occurs between users entirely electronically, with no backing currency—is recorded in “blocks” in this ledger. Because the blockchain is decentralized, it’s nearly impossible to tamper with; because the record is shared between all nodes in the network, any unauthorized change can be quickly spotted. This immutability is one of the characteristics that makes Bitcoin so appealing in an era rampant with fraud and identity theft.
Ancient civilizations introduced various forms of physical money early on. Ancient Chinese and Indian cultures used cowry shells as currency; Ancient Rome ascribed value to cattle, oxen, and sheep for use in trading; and Ancient Greeks and Lydians developed coins sometime in the first millennium BCE. However, the concept of the ledger—on which Bitcoin is based—also dates back millennia. In some cases, ancient civilizations were conducting trade based solely on a public record—and though it was recorded on a stone or a stick, there’s a clear resemblance to the blockchain.
Take the Yapese civilization on the Micronesian island of Yap. As early as 500 AD, the Yapese began mining limestone on the nearby island of Palau and bringing it back to Yap. They carved the stone into large, flat circles with a hole in the center and which can weigh up to four tons. Though the sizes of these Rai stones vary (the largest is 12 feet in diameter), their value depends not only on their size, but also on their age, craftsmanship, and whether anyone died in its mining and transport (if no one died, the value is higher). The Yapese use these giant stones as a means of currency, and when a transaction occurs, ownership of the Rai stone is transferred simply by a verbal agreement. In other words, it is recorded in the public, oral history. What’s important is that everyone understands who the stone belongs to, whether or not it is physically accessible to the owner. (For instance, a Rai stone that sunk to the bottom of the ocean is still traded by the Yap even though no one can physically confirm its existence.)
Like Bitcoin, Rai stones are largely indestructible and impervious to fraud—if anyone tampers with either a Rai stone or a Bitcoin blockchain, the fraud and its perpetrators are publically known. More importantly, in both systems, ownership is agreed upon by consensus and the currency is not owned by any single entity (such as a bank or a government) nor backed by anything valuable (such as gold).
Another ledger-based currency system is the split tally, which dates back to medieval Europe. Though coins had already existed, they were in constant shortage, so early Europeans developed a ledger system for conducting everyday transactions. In this system, the value of a transaction was denoted by a series of notches on a stick, which was then split lengthwise down the middle. Each party kept one half of the stick, each of which had half the tallies marked on it. The particular way the stick was split meant that the two halves could only be matched up with each other, providing indisputable proof of the transaction which was often used as evidence in the courts. Again, this system was impervious to fraud, because if one party tried to tamper with the notches on his half of the stick, the other party had proof that the new tallies did not exist in the original.
Tally sticks and Rai stones are among a number of debt- and ledger-based early monetary systems. Rather than necessarily trading in fiat, many early civilizations understood the notion of abstract proof and relied on transactional records and public knowledge to go about their daily business— a conceptual model that formed the foundation for the blockchain and allowed cryptocurrencies to come into their own many centuries later.
Centuries later—long after Rai stones, tally sticks, and other ledger-based currency systems began to pave the way—people began exploring the concept of digital currency in order to promote safe commerce.
Before Bitcoin emerged in 2008, the first glimmer of a cryptocurrency appeared in 1983, when David Chaum invented the “blinding formula,” which allows “tokenized” coins to be passed untraceably from person to person. In other words, to make a transaction, one person gives another a number, which is modified by the receiver. When the “coin” is deposited in a bank, it retains the original signature of the mint, but is not the same number the mint signed. This allows the transaction to proceed blindly. Chaum then started DigiCash in 1994, which made blind cash more widely available, but bankrupted soon after. Still, the concept of digital cash was born, leading shortly thereafter to similar crypto-companies like WebMoney and e-Gold, before Bitcoin stuck, influencing a whole slew of competitors like Ripple, DogeCoin, and Tenebrix.
While some cryptocurrencies fared better than others over the years, one thing that they all had in common was their rootedness in mutual understanding and transparency—characteristics developed for new technologies but already in existence in some of the earliest currency systems in the world.
The rise of the math-based system
In addition to ancient ledger systems and early recordkeeping precedents, cryptocurrencies also owe their existence to mathematics. They’re rooted in public key cryptography, which—to grossly simplify things—is based on the idea that a public key can be used to encrypt a message, but decryption requires the receiver's private key. One benefit of this system is that, unlike many security solutions that exist, the information in a transaction can be transmitted across unsecured channels without the risk of a breach. In other words, an encoded message—or, in the case of cryptocurrencies, a sum of money—can be transmitted securely and without fault as long as the sender has the recipient’s public key, and the recipient have their private key. The public key does not have to be encoded, but it is nearly impossible to decode it without the private key.
The use of cryptography is particularly important to cryptocurrencies because, in a digital world, the ability to transmit an encrypted message allows the information transfer to occur via public channels, eliminating the need for a third party—including a government or state. While third parties are well and good as long as they can be trusted, this quickly breaks down when one or both of the two parties in a transaction lose trust in that intermediary. Cryptocurrency replaces third parties with math—and if we can’t trust math, we’ve got bigger problems.
Without going into the details, it’s important to understand that there are many types of cryptography, each one based on different mathematical problems. In the 1980s, elliptic curve cryptography came to the forefront of the field because it uses smaller keys and therefore provides faster operations without simplifying the code— it is now the preferred method for public cryptography. Elliptic curve cryptography has been used for a wide variety of purposes—notably to solve the notoriously difficult Fermat’s Theorem in 1994—and eventually became the basis for Bitcoin.
In short, Bitcoin and other digital currencies can only function because of the math they’re based on. The sheer difficulty of solving—or hacking—the cryptographic keys keeps the transaction information safe as it’s transferred over public channels. If you’re interested in the math itself, a brief explanation of elliptic curves can be found here. But what it boils down to is that cryptocurrencies allow anyone to send an encrypted file using elliptic curves—and send it over normal, unencrypted channels at that. The beauty of relying on public key cryptography lies in the next step: Only the person with the private key can unlock the encrypted file, which, in the case of Bitcoin, means that only that person can receive the sum of money being sent.
Further, several mathematical models have been, well, key, in laying the theoretical foundation for public key cryptography and its relationship to the blockchain. For instance:
- The Diffie-Helman, or exponential, key exchange was published in 1976 and was one of the earliest examples of the use of the public key. This model uses modular arithmetic and a mutual agreement between the two parties, who each choose “public keys”, or exponents, to share with each other, and each choose a private key that only they can use. This, by means of some complicated mathematics explained here establishes a “shared secret” between two parties. Information can be exchanged freely and in public as long as each party keeps his or her own private key secret. Even modern computers would have difficulty cracking this kind of code.
- RSA encryption was also developed in the 1970s and relies on factoring enormous numbers to provide encryption. In this model, the public key is the large number; the private key are its large, prime factors, which are essentially impossible to crack without already knowing them. This difficulty provides the encryption process with its security.
- In 1985, the ElGamal Cryptosystem was developed, which builds on the Diffie-Helman key exchange by using the same discrete logarithm problem. It provided an alternative to RSA encryption. Where RSA relies on the difficulty of factoring large numbers, ElGamal relies on the difficulty of computing logs.
- Finally, also in the 1980s, elliptic curve cryptography came to the forefront of the field as a variation on RSA. It is now the preferred method for public cryptography because it uses smaller keys and provides faster operations, without simplifying the code. Elliptic curve cryptography has been used for many purposes—notably to solve the notoriously difficult Fermat’s Theorem in 1994—and eventually became the basis for Bitcoin.
As is the case with many innovations, Bitcoin and other cryptocurrencies can feel like entirely new concepts—but it’s worth keeping in mind the centuries of history (and hard work from mathematicians past) that play a role in how these modern advancements originated.