1.1 Introduction

The series ‘Blockchain in Brief’ will aim to concisely cover some essentials in the embryonic stage of crypto, such as David Chaum laying the technical roots and groundwork for privacy on blockchain technologies. Then the milestones marked by the successes and failures of exploration within this space working towards the vision of decentralised finance. Followed by current and future considerations for decentralised currencies, such as power consumption and quantum concerns.

1.2 David Chaum’s Blind Signatures for Untraceable Payments

Many believe Chaum laid the foundations for decentralised currencies to be built upon, as he was able to introduce particular advancements to cryptography that later enabled blockchain. This started when Chaum released a paper in 1982 proposing the importance of untraceable and private payments, anticipating the desire and need for privacy within an electronic payment system. He viewed the need for untraceable payments as paramount because “every transaction made by an individual can reveal a great deal about the individual's whereabouts, associations, and lifestyle” [1]. This then led him to design and propose a “fundamentally new kind of cryptography” which enabled the “inability of third parties to determine the payee”, and the “ability of individuals to provide proof of payment” [1].

A new form of cryptography emphasising privacy and proof was key to helping blockchain’s success. This is because features like pseudonymity, where everyone is represented as a public address hash on the blockchain were only possible through these findings. This is a feature fundamental to Bitcoin's success as “third parties [have an inibility] to determine the payee” [1]. Allowing the separation of users from software: eliminating the need for users to disclose personal information. This is especially important as digital surveillance is more and more present and accepted, as is the “unprecedented scope and magnitude of state-corporate surveillance of our everyday digital activities” [9]. Bolstering Chaum’s clairvoyance and contributions, as he was able to aid concerns about privacy and surveillance in the current digital age before they had manifested.

1.3 Early Attempts at Digital Currency

Douglas Jackson and David Chaum will be the first creators of digital currencies/payment systems discussed in this literature review. Firstly, David Chaum’s attempt at digital currency in 1989, DigiCash. The system used blind signature cryptography, allowing users to withdraw cash from banks and spend it anonymously, while still ensuring the authenticity and validity of the currency [2]. DigiCash was able to attract interest from two major banks, Deutsche Bank [4] and The Mark Twain Bank [2], making the first precurser of modern cryptocurrency rather successful. Despite the promising start, issues began to accrue for DigiCash stemming from centralisation, where Chaum was described as a “control freak” and as very paranoid, leading to him backing out of major deals with companies like Microsoft and Visa, whilst the business choked on high wages [5]. In summary, the article suggests that poor leadership, lack of business strategy, and high costs bankrupted DigiCash in 1998, leading it's failure [5].

Secondly, eGold. eGold was founded by Douglas Jackson. The idea was to store precious metals through third-party custodians, which members of eGold could buy, store and trade with other members [6]. Because the costs of trading and transferring balances between account holders were minimal (a maximum cost of 50 cents), this allowed an environment in which value could be exchanged inexpensively. Additionally, eGold had a simple early implementation of the modern crypto wallet, called an Examiner [6]. This tool “shows account holders what is in their accounts, [and also] allows them to prove it to third parties” [6]. This overall produced a product which was a great first instance of electronic money, where you could trade in a relatively frictionless environment, and the contents of your account had value as they were backed by precious metals (Gold, Silver, Platinum, Palladium) [7]. The reserves were able to grow from $354,381.39 of Gold in January 2000 [7], to 3.8 metric tonnes of Gold held in London and Dubai [8]. The issues began when servers started to buckle under the high and growing load, swarms of phishing attacks and Justice Department investigations after online scammers used the service to send payments anonymously across the world [8]. Jackson argued his payment system was not entirely a payment system, but also not entirely a bank [8], almost foreseeing decentralised currency. Further in 2005, FBI agents raided the eGold offices and precious metal deposits. Later on “Jackson pleaded guilty … to conspiracy to operate an unlicensed money transmitting service and conspiracy to commit money laundering” [8].

Both of these early instances of digital cash rhyme in why they were unsuccessful: they faced fundamental challenges that only decentralisation could address. In essence, there was no way to achieve consensus on the validity of transactions without a central authority; there was too much control from leadership; or, all legal ramifications went directly back to the creators and starters of these technologies [8].

This is end of part 1… part 2 will be released soon on our History Series.

References:

[1] - (1982) Blind signatures for untraceable payments. Available at: https://www.hit.bme.hu/~buttyan/courses/BMEVIHIM219/2009/Chaum.BlindSigForPayment.1982.PDF

[2] - Kagan, J. ECash: Overview, rise and fall, Investopedia. Available at: https://www.investopedia.com/terms/e/ecash.asp

[3] - The SEC has approved bitcoin etfs. what are they and what does it mean for investors? (2024) The Guardian. Available at: https://www.theguardian.com/technology/2024/jan/11/bitcoin-etf-approved-sec-explained-meaning-securities-regulator-tweet

[4] - Digicash’s ecash to be issued by Deutsche Bank Press Release - DigiCash’s ecash to Be Issued by Deutsche Bank. Available at: https://web.archive.org/web/19971110125050/http://www.digicash.com/news/releases/ec_pres5.html

[5] - How digicash blew everything. Available at: https://cryptome.org/jya/digicrash.htm

[6] - JACKSON, T., 1999, Jul 13. When gold makes cents: It may sound crazy, but the eGold payment mechanism based on deposits of precious metal, is cheap, efficient and easy: [London edition]. Financial Times, 18. ISSN 03071766. (Available at: https://www.proquest.com/docview/248786094/233FF036422D4CD4PQ/1?accountid=12115&sourcetype=Newspapers)

[7] - Ray, J.M. (no date) [e-gold-list] some numbers to play with, The Mail Archive. Available at: https://www.mail-archive.com/e-gold-list@talk.e-gold.com/msg02724.html

[8] - Zetter, K. (2009) Bullion and bandits: The improbable rise and fall of E-Gold, Wired. Available at: https://www.wired.com/2009/06/e-gold/

[9] - USN. Available at: https://openarchive.usn.no/usn-xmlui/bitstream/handle/11250/2788403/2021_Master_Ronning.pdf?sequence=1

Author: JL. @zeroString_ on X https://x.com/zeroString_.

21/07/2024