Blockchain technology gets a lot of attention without the understanding it deserves. If you’re like many, you may think that blockchains are a brand new invention and you might be surprised to learn that’s not the case.
At Addition Financial, we’ve been getting a lot of questions from our members about blockchain technology and cryptocurrency. Since it’s a popular topic, we thought it would be a good idea to write about blockchain history and let you know how long the technology has been around as well as how we believe it will impact us in the future.
1982: Data Storage and Cryptography
Any explanation of the history of blockchain technology must begin with David Chaum. Chaum is a computer scientist and cryptographer who is recognized as the person who invented digital cash and is sometimes referred to as the godfather of cryptocurrency.
It was David Chaum’s 1982 computer science dissertation, entitled “Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups,” that laid the foundation as the first known proposal for what we now know as blockchain protocol.
Let’s talk about the phrase “mutually suspicious groups” and what that means. In a typical computer system or network, there is a single managing authority whose responsibility it is to maintain the system and any data it contains.
The idea behind blockchain technology is that the system is peer reviewed and maintained. The system is shared across multiple computers and computer networks. The “mutually suspicious” part refers to a built-in skepticism that requires the parties to agree upon the validity of data before it can be added to the system.
David Chaum also introduced the idea of the blind signature, a process that allows for data to be disguised (encrypted) before it is signed. It’s an idea that plays an important role in the world of cryptocurrency, which allows for money to change hands without jeopardizing either party’s privacy.
1991: Protecting Document Timestamps from Tampering
While David Chaum continued to work on his ideas related to digital currency, the next big leap in blockchain history came from two other men named Stuart Haber and W. Scott Stornetta. They expanded on Chaum’s work in 1991 when they published a paper entitled, “How to Time-Stamp a Digital Document.”
The key development from the work of Haber and Stornetta was the introduction of the idea of hashing to prevent time-stamps from tampering. In case you’re unfamiliar, the word hash has a specific meaning in the world of blockchain technology. A hash is a mathematical function that translates strings of data of varying lengths into a value of a fixed length. It’s important to note that a hash is a one-way function, so nobody can take a hash and reverse-engineer it to get to the original data.
Haber and Stornetta described the function of a blockchain network without calling it that. Now it’s time to talk about the person who coined the phrase and created the very first blockchain.
2008: The Bitcoin Whitepaper
The point in history when blockchain technology came into the public eye was in 2008 when an unknown person using the pseudonym Satoshi Nakamoto published a whitepaper explaining how a peer-to-peer network could be used to timestamp digital currency transfers without requiring the signature of a trusted party.
It was Nakamoto who described the idea of gathering data into blocks that would then be verified by Chaum’s mutually suspicious parties. In the whitepaper, he laid out a system where a network of computers known as nodes would work independently to solve a hash that would establish the data’s place in a previously-established chain.
The idea was that any time stamp would need to be mathematically linked to the previous block before it could be added to the chain. By requiring independent verification of the block, Nakamoto proposed that the decentralized application of logic would make it difficult for any node to tamper with the chain.
Nakamoto also laid out the idea of rewarding the node that solved the hash for a new block with a coin, or unit of cryptocurrency. We should note that he did not specifically mention Bitcoin – that comes later.
2009: The History of Bitcoin
The year after publishing that famous whitepaper, Nakamoto established the first decentralized blockchain, the Bitcoin blockchain, on January 2, 2009. On that day, the very first block in the chain, which is also known as the Genesis Block, was mined.
Mining is the process by which nodes in the blockchain network verify timestamps and add blocks to the chain. It requires an enormous amount of computational power to solve the hash. When the first node solves it, the other nodes in the network must verify it – and only when 51% of all nodes have agreed upon the hash is the block of data added to the chain.
The first test transaction to add a new block to the Genesis Block happened about a week later. In the early days of the Bitcoin blockchain, most of the trading occurred between miners and many of them did it for fun and to improve their mining skills.
The Bitcoin blockchain is a public blockchain, which means that anybody can access it – and in theory, anybody can add data to the chain if they can solve the hash. Not all blockchains are public. There are also permissioned blockchains, where nodes are limited in their ability to access and verify data, and private blockchains, which limit access to the chain itself.
In the years since its creation, the Bitcoin blockchain has grown exponentially. In 2014, it contained 20 GB of data, and by April of 2022, the blockchain had grown to hold 389.72 GB of data.
Cryptocurrency and Beyond: Blockchain Solutions Around the World
Since the inception of Bitcoin, the use of blockchain technology has expanded dramatically. In the years immediately following the launch of Bitcoin, other cryptocurrencies were established, including Litecoin, Namecoin and the cryptocurrency that was launched as a joke, Dogecoin.
In 2011, a man named Vitalik Buterin established Bitcoin Magazine, and in 2015, he – together with Gavin Wood, Joseph Lubin, Anthony di Iorio and Charles Hoskinson – launched the Ethereum blockchain, which allowed for the creation of smart contracts.
Smart contracts point in the direction of how blockchain technology can be used for far more than trading cryptocurrency. A smart contract is a piece of code that runs automatically when a set of predetermined conditions are met. For example, the code might trigger a payment to a vendor or the shipment of an order.
Now, let’s look at four potential uses of blockchain technology to understand how its use has evolved.
Government Services
The government of Estonia became the first government to implement blockchain back in 2008, making them true pioneers. Officials there saw the potential and as of 2022, they use blockchain to secure the following governmental resources:
- Business Registry
- Digital Court System
- Healthcare Registry
- Property Registry
- State Gazette
- Succession Registry
Other countries have followed suit, with Australia taking steps to protect digital voting with blockchain technology and the UK Department of Work and Pensions working toward tracking welfare payments with blockchain technology.
Storage of Private Health Information
The search for secure methods of storing protected health information has been extensive both in the United States and around the world. HIPAA regulations require medical providers in the US to take steps to ensure that patients’ medical records are kept private and companies can pay high fines if their records are compromised.
As we noted above, the government of Estonia has already adopted blockchain technology for its Healthcare Registry. People who predict the evolution of blockchain agree that using the technology to protect private information is going to become more common as the healthcare industry embraces it.
Smart Contracts
Even the most cursory Google search about blockchain technology reveals that in every industry, leaders are thinking about the potential uses of blockchain and how it can revolutionize what they do.
Smart contracts, as we mentioned above, allow parties to codify elements of a contract to ensure that agreed-upon processes and actions take place when the specified conditions have been met.
We should note here that a smart contract is not the same thing as a legal contract and cannot replace a legal agreement. Think of a smart contract as a way to back up a legal contract by locking the contracting parties into the agreement and its milestones. They can be used in supply chain management, manufacturing and many other places.
Financial Transactions
The first use of blockchain technology was to verify digital currency transactions, but the tech has uses that extend into nearly every corner of the financial world.
For example, identity theft is a potential risk in any transaction when hacking is a possibility. Many large retailers have experienced data breaches that put their customers’ credit card numbers at risk and eroded the public’s trust in them.
A company called OpenBazaar was launched in an attempt to use blockchain protocol for retail transactions. The company failed but it’s reasonable to expect that other attempts will follow.
Blockchain history may be short compared to world history, but the development of this technology has the potential to change the world in ways we can only imagine. We’re excited about the possibilities and it’s our goal to keep our members informed of how blockchain technology will affect them and their finances.
Do you need assistance managing cryptocurrency or investments in blockchain companies? Click here to learn about our MEMBERS Financial Services Program and schedule an appointment with one of our Financial Professionals.
Posted on Apr 8, 2022
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