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Cypherpunks and the Creation of Cryptocurrency

The creation of cryptocurrency began with the cypherpunks, a small community of programmers, coders, activists and visionaries who were focused on privacy-enhancing technologies through cryptography starting in the 1990s.

“Privacy is necessary for an open society in the electronic age,” proclaimed Berkeley mathematician Eric Hughes in “A Cypherpunk’s Manifesto” in March 1993. “Privacy is not secrecy. A private matter is something one doesn't want the whole world to know, but a secret matter is something one doesn't want anybody to know. Privacy is the power to selectively reveal oneself to the world.”

One of the original cypherpunks, Hughes also pointed out that privacy means that each party to a transaction has only the limited knowledge that is directly necessary for that transaction: “When I purchase a magazine at a store and hand cash to the clerk, there is no need to know who I am.”

In the burgeoning electronic age, Hughes identified cryptography as necessary for privacy because “we cannot expect governments, corporations, or other large, faceless organizations to grant us privacy out of their beneficence...We must defend our own privacy if we expect to have any.” (For more, see: Explaining the Crypto in Cryptocurrency.)

And that’s what Hughes and the other cypherpunks aimed to do through writing software to defend privacy and publishing the code behind that software so that anyone could use it. The original cypherpunks identified anonymous mail forwarding systems, digital signatures and electronic money as means to defend privacy via cryptography.

The Origins of the Cypherpunks

The cypherpunks became a semi-organized group at a casual 1992 meeting of about 20 computer scientists, coders and civil libertarians in San Francisco led by Hughes, Intel employee Tim May, and computer scientist John Gilmore. All three were young retirees thanks to their early career successes. The group convened to discuss the big problems in programming and cryptography.

In one of the group’s monthly meetings, hacker and author Jude Milhon, or “St. Jude,” coined the term the group would become known by. It was a play on “cypher,” the process of encrypting data and a sci-fi subgenre called cyberpunk. The group expanded its reach through a mailing list of like-minded, liberty-focused individuals who used then-new PGP (pretty good privacy) encryption to keep their messages private.

Computer scientist and cryptographer David Chaum is considered the original cypherpunk. His 1985 paper, “Security without Identification: Transaction Systems to Make Big Brother Obsolete,” is about the concepts that underlie cryptocurrencies and blockchain technology and about methods that would allow individuals and organizations to maintain their privacy across various transactions so that those transactions cannot be linked to compile files of information about people.

His work, in other words, can be thought of as a precursor to bitcoin, the first widely adopted cryptocurrency. But wait - isn’t bitcoin the original cryptocurrency, not just the first widely adopted one? Not quite.

Bitcoin’s Forefathers

There were actually a few cryptocurrencies formulated before bitcoin. Chaum’s DigiCash, conceptualized in 1983 and released in 1994, allowed the first use of software-only electronic cash technology to pay by computer over email or the internet.

“Electronic cash has the privacy of paper cash while achieving the high security required for electronic network environments exclusively through innovations in public key cryptography,” the DigiCash press release stated. The initial release was only of the software, for testing purposes. DigiCash’s E-cash became usable by the public the following year. (For more, see: How Bitcoin Works.)

E-cash marked a big step forward in online payments, which were previously only possible via credit card. The currency made it possible to transact in small amounts between people who didn’t have credit-card vendor accounts, such as individuals, and to transact anonymously. Only 5,000 users signed on over three years, however, and the project folded.

Later that decade, two cypherpunks, Adam Back and Wei Dai, came up with hashcash and b-money. Hashcash was Back’s method for making spam too costly to send. It required the sender of an email to prove that they had spent significant time and computational power to create an email header stamp - not unlike the proof-of-work process that underlies the bitcoin blockchain. He described his method on the cypherpunks mailing list in 1997.

B-money was Dai’s creation. He published his method to the cypherpunks mailing list in 1998. Dai offered up a way to exchange money and enforce contracts that were distributed among a network of users, didn’t require the intervention of a third party such as a government, and couldn’t be traced thanks to encryption. Like the bitcoin blockchain, his idea included a way for participants to create money through computing effort. And his proposal for how to maintain records supporting the validity of transaction data and the amount of money belonging to each user is also reminiscent of the bitcoin blockchain, except that it uses a proof-of-stake concept that today’s ethereum blockchain uses instead of the proof-of-work concept that the bitcoin blockchain uses.

Dai concluded in his paper on b-money, “The protocol can probably be made more efficient and secure, but I hope this is a step toward making crypto-anarchy a practical as well as theoretical possibility.” His wish has certainly been fulfilled.

Bitcoin as the First Viable Cryptocurrency

The pseudonymous Satoshi Nakamoto, the inventor of bitcoin, cites Back’s and Dai’s currencies in the well-known 2008 bitcoin whitepaper, “Bitcoin: A Peer-to-Peer Electronic Cash System” - also originally sent to a cypherpunk mailing list. The bitcoin whitepaper’s major contribution was how to eliminate, without the use of a third-party intermediary, the double-spending problem: the risk that a coin could fraudulently be used more than once.

Like its theoretical predecessors, bitcoin and its blockchain also allow users to control their money and their privacy. But bitcoin got off the ground in a way that hashcash and b-money never did. The first bitcoin was mined in January 2009, and almost ten years later, it has a multibillion-dollar market capitalization.

With bitcoin, perfect anonymity is still a work in progress. Bitcoin is more pseudonymous than anonymous. Although transactions are all publicly visible on the blockchain, the owner of each wallet is not known, unless at some point a person’s real-world identity can be linked to a specific address. If that occurs, every transaction linked to that address can be traced back to the individual's identity. This can happen in any number of ways including, during the KYC (know-your-customer) process when opening an account on an exchange, buying goods with bitcoin that require a shipping address or publishing your name and wallet address online.

ZCash, Monero and Dash, along with several others, are referred to as privacy coins and utilize a public ledger like bitcoin. But they use various means of obscuring the sender and receiver of a transaction, which prevents tracking the activity of wallet addresses and therefore are more anonymous than a bitcoin transaction.

Cypherpunk Today

The visionary cypherpunks foresaw in the 1980s and 1990s some of the biggest problems internet users face today: how to ensure security, privacy and anonymity within a largely insecure and public infrastructure. The explosion of cryptocurrencies and the flourishing of blockchain technology in recent years mean that their ideas might finally become wide-scale realities. (For more, see: Could Cryptocurrencies Replace Cash?)