Electronic cash
The concept of electronic cash or digital currency is not new. Since the 1980s, e-cash protocols have existed that are based on a model proposed by David Chaum.
Just as understanding the concept of distributed systems is necessary to comprehend blockchain technology, the idea of electronic cash is also essential in order to appreciate the first and astonishingly successful application of blockchain, Bitcoin, or more broadly cryptocurrencies in general.
Two fundamental e-cash system issues need to be addressed: accountability and anonymity.
Accountability is required to ensure that cash is spendable only once (double-spend problem) and that it can only be spent by its rightful owner. Double spend problem arises when same money can be spent twice. As it is quite easy to make copies of digital data, this becomes a big issue in digital currencies as you can make many copies of same digital cash. Anonymity is required to protect users' privacy. As with physical cash, it is almost impossible to trace back spending to the individual who actually paid the money.
David Chaum solved both of these problems during his work in 1980s by using two cryptographic operations, namely blind signatures and secret sharing. These terminologies and related concepts will be discussed in detail in Chapter 5, Symmetric Cryptography and Chapter 6, Public Key Cryptography. For the moment, it is sufficient to say that blind signatures allow for signing a document without actually seeing it, and secret sharing is a concept that enables the detection of double spending, that is using the same e-cash token twice (double spending).
In 2009, the first practical implementation of an electronic cash (e-cash) system named Bitcoin appeared. The term cryptocurrency emerged later. For the very first time, it solved the problem of distributed consensus in a trustless network. It used public key cryptography with a Proof of Work (PoW) mechanism to provide a secure, controlled, and decentralized method of minting digital currency. The key innovation was the idea of an ordered list of blocks composed of transactions and cryptographically secured by the PoW mechanism. This concept will be explained in greater detail in Chapter 8, Introducing Bitcoin.
Other technologies used in Bitcoin, but which existed before its invention, include Merkle trees, hash functions, and hash chains. All these concepts are explained in appropriate depth in Chapter 6, Public Key Cryptography.
Looking at all the technologies mentioned earlier and their relevant history, it is easy to see how concepts from electronic cash schemes and distributed systems were combined to create Bitcoin and what now is known as blockchain. This concept can also be visualized with the help of the following diagram:
