The 2008 financial crisis shook the global economy to its core, leaving people stressed, angry, and confused. Many felt betrayed by corrupt financial institutions that had grown too big to fail. In the years since Bitcoin has emerged as a popular alternative to traditional financial systems, and many investors are unaware that this innovative technology was inspired by a specific event that took place during the crisis. What event was cited as the inspiration for the creation of Bitcoin? This article will answer that question while illustrating how the 2008 financial crisis influenced the development of Bitcoin and its goal to create a decentralized financial system that eliminates the need for corrupt intermediaries. We will also touch upon what is bitcoin halving and how to invest at the time.
Bitcoin Magazine Pro's Bitcoin analysis can help readers understand how the 2008 financial crisis influenced the creation of Bitcoin as an alternative to traditional financial systems.
How and When Did Bitcoin Start?
Bitcoin's origin story began long before the publication of its white paper in 2008. While Bitcoin is often viewed as a singular invention, it synthesizes existing technologies and ideas that date back decades. Understanding Bitcoin's vibrant prehistory is essential to contextualizing its emergence as a social and technological phenomenon.
The Ideology Behind Bitcoin
Technically speaking, Bitcoin is just a computer program. However, the software’s creation and implementation have defined an entire movement with distinct values and virtue, many of which are reflected in Bitcoin’s code.
Bitcoin’s initial supporters consisted mainly of tech-savvy individuals, libertarians, and anarchists. This community's early adoption of Bitcoin has come to define its values, virtues, and fundamental design.
When Satoshi Nakamoto revealed their proposal for Bitcoin, it garnered a small amount of interest and criticism from a niche online community of computer scientists. Many of these individuals had been involved in digital cash experiments throughout the eighties and nineties.
To them, Bitcoin was simply the latest in a long sequence of experiments in creating monetary systems that respected individual freedom and privacy. In tracing the ideological roots of Bitcoin back far enough, it can be found that Bitcoin’s formative influence largely stems from the discourse surrounding two particular communities.
Extropians: The First Bitcoin Influencers
In 1988, a futurist named Max More developed the philosophy of “extropianism” in a series of written principles that detailed an “evolving framework of values and standards for continuously improving the human condition” through the use of emerging technologies such as cryogenics, artificial intelligence, robotics, memetics, genetic engineering, space travel, and more.
An extropian individual actively builds and tests these systems for the betterment of humanity while adhering to a strict rationalist mindset unhindered by dogmatism. One of the core concepts of this community is life extension through the use of:
- Cryogenics
- Mind-uploading
- Other means.
This transhumanist ideology brought together a community of scientists and futurists who shared these ideas on early online forums. From the late eighties into the early to mid-nineties, the extropians prototyped designs for alternative currencies, idea markets, prediction markets, reputation systems, and other experiments that foreshadowed much of the current Bitcoin space. Several pioneers were active in the extropian community, including Nick Szabo and Hal Finney.
Cypherpunks
“Privacy is necessary for an open society in the electronic age. [...] Privacy is the power to reveal oneself to the world selectively.”
Eric Hughes, “A Cypherpunk’s Manifesto”
Like the extropians, the cypherpunks were united by a shared emphasis on technology to create a better world. The cyberpunk subgenre of sci-fi literature often portrays a future in which a global conspiracy of corporations effectively rules the world through ubiquitous surveillance systems, with the protagonists often being hackers or other individuals maneuvering through this dystopian society.
The cypherpunks were so-called because they saw the works of authors John Brunner, William Gibson, and Bruce Sterling as plausible scenarios, given the trends in sociopolitical progress and technological innovation. They believed the rise of global computer networks mediated by governments and corporations would systematically compromise liberty and freedom.
The Cypherpunk Roots of Bitcoin and Digital Currency Innovation
The cypherpunks were a community of computer scientists and futurists dedicated to building the systems necessary to secure individual sovereignty amid a potential surveillance state.
Contrary to the extropians, the cypherpunks emphasized a particular set of technologies around encrypted communication networks, including anonymous messaging and electronic money. The cypherpunk movement drove many digital currency experiments throughout the 1990s and early 2000s, and this community is the soil from which Bitcoin grew.
The Technical Foundation of Bitcoin
The key to understanding Bitcoin is realizing it not as a singular, unique invention but a clever synthesis of prior work that succeeded where past efforts failed. Satoshi sought to build a trust-minimized financial infrastructure that could persist years into the future.
Instead of building a new solution in a vacuum, he built upon past research in distributed systems, network security, and more.
eCash: The First Digital Cash System
David Chaum is the most influential person in the Bitcoin space. His pioneering work in digital currency systems dates back to the 1980s, when the Internet was still nascent before the launch of the World Wide Web.
In 1981, Chaum published a groundbreaking paper, “Untraceable Electronic Mail, Return Addresses, and Digital Pseudonyms,” a foundational document in the realm of privacy on the internet that directly led to the creation of privacy protocols such as Tor. In 1982, Chaum published “Blind Signatures for Untraceable Payments,” a keystone document detailing an anonymous transaction system that would inspire future digital currency experiments.
eCash Payments System
The eCash payments system was Chaum’s attempt to bring the privacy of physical cash and coins to the digital realm with the advent of electronic banking services. In 1989, Chaum founded DigiCash, which was headquartered in Amsterdam. Chaum and his team built out the eCash protocol. Throughout the latter half of the nineties, Chaum struggled to secure enough partnerships with merchants and banks to sustain the project and declared bankruptcy in 1998.
While the venture didn’t last, eCash blazed new trails in the digital currency space. While not a natively digital currency like Bitcoin, eCash foreshadowed what has now become known as central bank digital currencies, or CBDCs, and stablecoins digital assets backed by reserves and issued by a trusted third party such as a bank or corporation.
E-gold: The Digital Gold Experiment
Founded by Douglas Jackson and Barry Downey in 1996, E-gold was a digital currency system backed by gold reserves in vaults in London and Dubai. Denominated in grams, E-gold provided an alternative online payment system capable of fast, borderless value transfer, but the project faced significant legal and systemic issues.
The E-gold economy was conducted via a central server maintained by a single company, which produced a single point of failure or disruption in case of a dispute between operators or shutdown/seizure by authorities. The E-gold system originally didn’t have many restrictions regarding account creation, which led to the currency being used in various criminal activities. While Jackson and the team tried to counter the criminal use of E-gold, they were ultimately found guilty of running an unlicensed money transmission enterprise, and the venture was shut down.
Early Digital Currencies and the Roots of Regulatory Challenges
Whereas eCash was an electronic currency system implemented in coordination with the legacy banking system, E-gold operated as a parallel financial system built entirely without the acknowledgment or input of regulatory authorities.
During this time, the United States government was wary of the public having access to public key and the means to encrypt their presence on the internet. Ventures like E-gold brought such concerns to transacting over communication networks. Much of the regulatory friction around alternative digital currencies that sparked during this time has persisted.
Peer-to-Peer Digital Cash: Cypherpunk Edition
While the previous digital currency systems influenced the design of electronic cash, the builders were not directly involved with that community. Chaum, for example, did not particularly subscribe to the cypherpunk ideology.
Active members conceived the following digital cash experiments for this community, which can be seen as direct precursors to Bitcoin. Either directly or indirectly, these proposals and implementations were influential to Satoshi’s invention of Bitcoin.
Hashcash: The First Bitcoin Inspiration
In 1992, IBM researchers Cynthia Dwork and Moni Naor explored methods for combatting Sybil attacks, denial-of-service attacks, and spam messaging on burgeoning internet services such as email. In their paper “Pricing via Processing or Combatting Junk Mail,” the pair proposed a system in which an email sender conducts some computational work to solve a puzzle.
The sender would then attach proof of the solution to the email: a proof-of-work, or PoW. While the computational cost of this process was fairly trivial, it would be enough to inhibit spam effectively. The system would also feature a “trapdoor,” allowing a central authority to instantly solve the puzzle without expending work.
Adam Back and the Development of Hashcash
In 1997, 26-year-old University of Exeter graduate and active cypherpunk Adam Back took to the cypherpunk mailing list and proposed a similar system called Hashcash. This system had no trapdoor, central authority or emphasis on puzzles. Instead, the process centered around hashing.
Hashing is the process of turning any piece of data of any size into a random string of characters of a predetermined length. The slightest change to the underlying data would result in an entirely different hash, allowing easy verification.
For example, a SHA-256 hash of the phrase “What is Bitcoin?” produces the following hexadecimal number:
Sha-256 Hash of The Phrase “What is Bitcoin_”
In Hashcash, a sender would repeatedly hash the metadata of the email such as:
- The sender’s address
- The receiver’s address
- The time of the message, etc.
Along with a random number called a “nonce” until the resultant hash begins with a predetermined number of zero bits. Because the sender can’t know the correct hash, they must repeatedly hash the email metadata using a different nonce until a valid combination is found. Like Dwork and Naor’s system, this process requires computational resources to generate proof of work.
As the name indicates, anti-spam was not the only use case Back had in mind for Hashcash. However, the proof-of-work tokens were useless to the recipient and could not be transferred, rendering them ineffective as digital cash. The currency would have also been subject to hyperinflation, as the ever-improving computation speed of new machines would make generating proofs easier and easier. Nevertheless, Back’s Hashcash would inspire the further application of proof-of-work in two proposed digital cash systems and precursors to Bitcoin: B-money and Bit Gold.
B-money: The Second Bitcoin Inspiration
In 1998, active cypherpunk Wei Dai proposed B-money, an alternative peer-to-peer, or P2P, financial system for conducting online commerce outside the legacy financial system controlled by enterprise gatekeepers and government regulation. The system would allow for the creation of digital currency and enacting and enforcing contracts, complete with an arbitration system to resolve disputes. Dai’s post consisted of two proposals.
Proposal 1
Dai’s first proposal removed the central authority’s singular control of a transactional database and replaced it with a shared ledger system among a network of pseudonymous peers represented as public key addresses. To mint a digital currency, a node must solve a computational problem and broadcast the solution to the network (a proof-of-work) in a multiphase auction. The number of assets issued would be determined by the cost of computation effort undertaken to a basket of standard commodities.
If Alice wanted to transact with Bob, she would broadcast a transaction to the entire network that included a packet of information containing the amount and Bob’s public key address. However, Dai realized that this initial proposal did not solve the double-spend problem because Alice could simultaneously spend the same assets as Bob and Carol.
Proposal 2
In his second proposal, Dai suggested that instead of everyone having a copy of the ledger, a special subset of peers, called “servers,” would maintain a shared ledger. At the same time, regular users simply verified that the server had processed the transactions. To ensure trust and prevent collusion, servers would deposit a certain amount of money in a special account, which would be used as a fine or reward in the event of malicious behavior, similar to proof-of-stake systems in other blockchains.
Dai’s proposal for B-money was never implemented, yet it is strikingly similar to Bitcoin, particularly with the shared ledger and PoW-based digital currency. The main difference, however, was that B-money’s currency was tied to a certain value of commodities, making it an early model for what would now be called a stablecoin.
Bit Gold: The Final Bitcoin Inspiration
Formerly an active member of the extropian and cypherpunk communities, Szabo is one of the most influential figures in Blockchain and blockchain technology development. He is a polymath who has studied disciplines ranging from computer science to law.
Szabo’s North Star is the vision of creating a free economic society outside the control of corporations and nation-states. In 1994, he proposed smart contracts, essentially digital contracts executed and enforced via code rather than jurisdictional law as a fundamental building block of borderless e-commerce.
Szabo's Vision: The Foundation for Digital Gold
He later realized a key element needed to be added, a natively digital currency that could flow through these contracts.
After witnessing a litany of digital cash experiments face obstacle after obstacle (and even working at Chaum’s DigiCash for a time), Szabo decided to work on a new proposal that could succeed where past efforts failed.
In studying the history of money, Szabo identified commodity money like gold bullion bits as a strong conceptual foundation for a new currency of the internet. This new money had to be digital, scarce, and incredibly costly to forge, and it had to not rely on trusted third parties to secure it and give it value as digital gold, in a sense. His proposal:
Bit Gold
Bit Gold works similarly to Hashcash, particularly B-money, in that it uses an accumulating chain of hash-based proofs of work that is periodically timestamped and published to a network of servers. The issuance and ownership of Bit Gold are recorded on a distributed property title registry. This protocol allows for the governance of certain property classes using a quorum-based voting system.
Where Bit Gold fell short as a currency was its lack of fungibility, i.e., when each unit is interchangeable for an identical unit for the same value, this is essential for any viable form of currency. Because the cost of a Bit Gold is related to the computational cost of the proof-of-work at a specific moment in time, and because the cost of computation would decrease with better machines, a unit of Bit Gold mined in 2015 would be worth less than a unit of Bit Gold mined in 2005.
Szabo's Bit Gold: A Secure Proposal with Social Consensus
Szabo proposed a second-layer solution involving a secure, trusted, auditable bank that could track the issuance of Bit Gold over time. The bank would continuously package the proof-of-work tokens into equal units of value, creating a stable medium of exchange.
However, the system would be susceptible to Sybil attacks that could cause a network split. Szabo believed any potential network split could be fixed by the honest participants continuing on their system and that the users would naturally side with them through social consensus.
Bit Gold's Legacy and Its Role in Bitcoin's Creation
Szabo was gearing up to finally implement Bit Gold shortly before Satoshi published the design for Bitcoin in 2008. After Bitcoin launched, he abandoned the Bit Gold project, believing that Bitcoin cleverly solved the shortcomings of Bit Gold and prior digital cash experiments by synthesizing prior attempts into a system that simply worked.
These two digital cash experiments were crucial to the invention of Bitcoin. In a 2010 Bitcointalk forum post, Satoshi stated, “Bitcoin is an implementation of Wei Dai’s B-money proposal [...] in 1998 and Nick Szabo’s Bitgold proposal.”
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What Event Was Cited as the Inspiration for the Creation of Bitcoin?
The 2008 financial crisis largely inspired Bitcoin. The global economic turmoil of that time, particularly the collapse of major financial institutions and the subsequent loss of trust in traditional banking systems motivated the creation of a decentralized currency. This event catalyzed Satoshi Nakamoto’s vision of creating an alternative to the financial system.
The Advent of Bitcoin
Bitcoin as it is known today first surfaced on Oct. 31, 2008, when the pseudonymous creator of Bitcoin, Satoshi Nakamoto, sent an email with a white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” to a cypherpunk mailing list where members discussed privacy-enhancing technologies as a tool for social and political change.
At the time, the world was in the thick of the 2007–2008 global financial crisis, one of the most severe worldwide economic crises in recent decades. The event has been attributed to the excessive risk-taking of international financial institutions, a build-up of toxic assets within banks, and the bursting of the United States housing bubble. The crisis came to a head on Sept. 15, 2008, when the Wall Street firm Lehman Brothers filed for bankruptcy. This eventually led to crises in national economies worldwide during what became known as the “Great Recession.”
The Genesis Block
On Oct. 31, 2008, Nakamoto emailed the cypherpunk mailing list, wrote about an electronic cash system that would be “fully peer-to-peer, with no trusted third-party,” and shared the Bitcoin white paper. The paper merged existing concepts with distributed ledger technology and introduced a decentralized system independent of central authorities.
At the time, the recipients could have had no idea that this project would pave the way for an entire industry worth $3 trillion at its peak in 2021. On Jan. 3, 2009, the Bitcoin blockchain went live when Nakamoto mined the genesis block and embedded a message that read: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” The message referenced a similar headline published by The Times newspaper in the United Kingdom on the same date. Many interpreted the message as a comment on the instability brought about by traditional finance.
Decentralization: The Core Principle of Bitcoin
The system operates on blockchain technology, a network-based ledger accessible to all participants, ensuring transparency and security. The mining process involves solving complex mathematical problems, generating new Bitcoins, validating and verifying transactions, and ensuring the system's integrity.
Transactions made on the blockchain are secure and verified, eliminating the need for an intermediary or third party. This decentralization is not just about technology; it's a social and economic shift, a new way of thinking about finance. It empowers individuals, promotes transparency, and challenges traditional power structures. Bitcoin's open-source nature ensures that it remains a decentralized network, where no single entity has the power to control it entirely. This decentralization is at the heart of Bitcoin's value proposition and its potential to revolutionize the financial industry.
The Impact of Bitcoin's Creation on Traditional Banking Systems
Bitcoin's creation underscored the potential fragility of the traditional banking system, which was laid bare during the 2008 crisis. Notably, the first Bitcoin block, the Genesis block, contained a recent headline from The Times newspaper: “Chancellor on brink of second bailout for banks.” By offering a decentralized alternative, Bitcoin highlighted the potential for a financial system that could operate independently of central banks and governmental control. It allowed ordinary individuals to participate in a financial system where they could have direct control over their transactions.
The Revolutionary Impact of Bitcoin on Traditional Finance
Bitcoin's creation did not just introduce a new form of currency and a new way of thinking about financial transactions and control. It represented a shift from a centralized to a decentralized system, from reliance on institutions to reliance on technology and collective trust.
While traditional banking systems continue to play a significant role in global finance, the creation of Bitcoin has undoubtedly reshaped their landscape, forcing them to evolve and adapt to the changing times. Despite the ongoing debates and controversies surrounding Bitcoin, its impact on traditional banking systems cannot be denied. It has forever altered our understanding of money and financial transactions, heralding a new era in finance.
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