Electronic Money and Cryptocurrency are NOT the same
First, a clarification: “Electronic money,” also called web-based money, was early crypto-anarchists’ go-to term, but these days it refers to virtual fiat currency. Your debit card is a prime example of electronic money–the transactions printed on your receipts represent cold, hard, government-backed cash. However, because the word “cryptocurrency” wasn’t coined until 2009, cryptocurrency pioneers used the word “electronic money” for what we now call “cryptocurrency” — a solely virtual currency that operates outside of traditional banks. For consistency’s sake, we’ll use the terminology favored in the time periods we discuss. So get ready for a lot of references to “electronic cash” and few to “cryptocurrency!”
As discussed in the first article of this series, Digicash, one of the earliest forms of electronic cash, failed. Yet, others learned from this failure and developed improved versions of electronic money. In 1997, Adam Back proposed hashcash, which deployed a proof-of-work system, the predecessor to Bitcoin’s mining process. In 1998, Wei Dai’s proposal on B-Money introduced a collective ledger concept similar to what we know today as the blockchain. And Bit Gold, proposed by Nick Szabo in 1998, touted decentralization, a key component of modern-day cryptocurrency.
Still, recurring challenges emerged. Electronic currency can exist in more than one place at a time, an impossibility for physical money, and this made double-spending possible. In addition, you can make as much electronic money as you want, and that affects its value. As an example: Diamonds are valuable because we have a limited supply. Pearls are worth less because they’re easier to come by. If you have an infinite supply of diamonds, pearls or digital tokens, then they become like grains of sand: worthless.
Enter Satoshi Nakamoto and Bitcoin
In 2008, Satoshi Nakamoto, the pseudonym for either an anonymous individual or group, released his whitepaper “Bitcoin: A Peer-to-Peer Electronic Cash System.” In it, he built on earlier iterations of electronic money and proposed a “version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution.” Bitcoin was also anonymous, meaning, while your transaction is recorded in the blockchain, your identity is not.
Surely, crypto-anarchists rejoiced.
Besides improving and merging early approaches to electronic money, Nakamoto solved two of its most pressing issues. 1. Bitcoin’s peer-to-peer system prevented double-spending. 2. Nakamoto limited the creation of bitcoins to 21 million, making it a finite supply, like gold.
Interestingly, Nakamoto never used the term “cryptocurrency” in his whitepaper. The word entered the lexicon in 2009 but wasn’t included in Merriam-Webster’s dictionary until 2018.
To sum up our history lesson: A blockchain pioneer’s manifesto turned into a crypto-anarchist movement, which prioritized privacy, opposed institutional control and favored electronic money. Various concepts for electronic money came and went for roughly 20 years. Then Satoshi Nakamoto created Bitcoin, an anonymous peer-to-peer electronic cash system that operates outside of financial institutions and eliminates the inherent issues of previous systems.
And so began cryptocurrency as we know it today!