A financial system with the aforementioned attributes is not a new concept. Ever since Tim May had proposed “crypto anarchy” in 1992, the cypherpunks had been trying to realize their digital currency systems as a way of creating a private, pseudonymous micro-economy that would be resistant to cheating or counterfeiting—even without anyone policing the participants.
Bitcoin was not the first attempt at digital money. Indeed, the idea was pioneered by David Chaum in 1983. In Chaum’s model, a central server prevented double-spending, but this was problematic:
“The requirement for a central server became the Achilles’ heel of digital cash. While it is possible to distribute this single point of failure by replacing the central server’s signature with a threshold signature of several signers, it is important for auditability that the signers be distinct 10 and identifiable. This still leaves the system vulnerable to failure, since each signer can fail, or be made to fail, one by one.” (1)
Digicash was another example of a currency that failed due to regulatory requirements placed on its central authority; it was clear that the necessity to police the owners of the system significantly undermined the efficiencies gained by the digitization of a currency system. (2)
Cypherpunk Wei Dei was directly influenced by crypto-anarchy when he came up with his decentralized “B-money” proposal in 1998. “I am fascinated by Tim May's cryptoanarchy,” he writes in the introduction to his essay: (3)
“Unlike the communities traditionally associated with the word ‘anarchy,’ in a crypto-anarchy the government is not temporarily destroyed but permanently forbidden and permanently unnecessary. It's a community where the threat of violence is impotent because violence is impossible, and violence is impossible because its participants cannot be linked to their true names or physical locations.”
Dai’s concept was based on recent developments in computer science which suggested that such a system might be feasible.
As of the early 2000s, recent innovations had made Wei Dai’s B-money concept possible. (4) Scott Stornetta and Stuart Haber had proposed something called “linked timestamping” in 1990 to build a trusted chain of digital signatures which could be used to notarize and timestamp a document, preventing retroactive tampering. (5) In 1997, Adam Back invented Hashcash, a denial of service protection for P2P networks, which would make it expensive and difficult for participants to collude to alter past transactions. (6)
Still, participants might collude to break the rules in other ways, such as to counterfeit coins. Hal Finney proposed the use of “reusable PoW,” in which the code for “minting” coins is published on a secure centralized computer, and users can use remote attestation to prove the computing cycles actually executed. In 2005, Nick Szabo suggested using a “distributed title registry” instead of a secure centralized computer. (7)
In early 2009, Satoshi Nakamoto released the first implementation of a peer-to-peer electronic cash system, wherein the central server’s signature of authority was replaced by a decentralized “Proof-of-Work” system. (8) Nakamoto wrote after launch that “Bitcoin is an implementation of Wei Dai's b-money proposal on Cypherpunks in 1998, and Nick Szabo's Bitgold proposal.” (9)
These foundational ideas cited by Nakamoto may have drawn on contemporary economic concepts about currency markets. In a lecture delivered at the Gold and Monetary Conference, in New Orleans in 1977, economist Friedrich Hayek said: (10)
“The monopoly of government of issuing money has not only deprived us of good money but has also deprived us of the only process by which we can find out what would be good money. We do not even quite know what exact qualities we want, because in the two thousand years in which we have used coins and other money, we have never been allowed to experiment with it, we have never been given a chance to find out what the best kind of money would be.”
This comment from 1984 is also widely attributed to Hayek: (11)
“I don’t believe we shall ever have a good money again before we take the thing out of the hands of government. We can’t take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can’t stop.”
(1) “Enabling Blockchain Innovations with Pegged Sidechains,” by Adam Back, Matt Corallo, Luke Dashjr, Mark Friedenbach, Gregory Maxwell, Andrew Miller, Andrew Poelstra, Jorge Timón, and Pieter Wuille, Oct. 22, 2014. Page 3. https://iterative.tools/2ztfBkH.
(2) "A Brief History of Digital Currencies," Strategic International Management Academic Library, https://iterative.tools/2QZgbNZ.
(3) Dai, Wei. “BMoney,” 1998. http://www.weidai.com/bmoney.txt.
(4) "Bitcoin's Academic Pedigree." https://iterative.tools/2O8HZk9.
(5) Haber, Stuart and Stornetta, W. Scott. “How to Time-Stamp a Digital Document,” Journal of Cryptology, Vol. 3, No. 2, pp. 99, 1991. https://www.anf.es/pdf/Haber_Stornetta.pdf
(6) Back, Adam. “Hashcash,” 2003. http://hashcash.org/.
(7) Szabo, Nick. Bit gold, 2005. https://iterative.tools/2NFIW48.
(8) Adam Back, Matt Corallo, Luke Dashjr, Mark Friedenbach, Gregory Maxwell, Andrew Miller, Andrew Poelstra, Jorge Timón, and Pieter Wuille. “Enabling Blockchain Innovations with Pegged Sidechains,” Oct. 22, 2014. https://iterative.tools/2ztfBkH.
(9) Bitcointalk.org, https://iterative.tools/2OQyd3t.
(10) Hayek, Freidrich. “A Free-Market Monetary System.” November 10, 1977. Available at https://iterative.tools/2ARHx1R.
(11) Coy, Peter. “Rethinking Currency: Finding a Better Way to Run an Economy,” Oct. 11, 2018. https://iterative.tools/2VWHhrc