For comfort, safety and freedom

When on October 31, 2008, the mysterious Satoshi Nakamoto announced a manifesto announcing the creation of bitcoin – the most popular cryptocurrency to this day – few people probably expected that this would be the beginning of epochal changes in the financial market. Shortly afterwards – on January 3, 2009 – digital money appeared on the market. It enabled fast, secure, direct peer-to-peer transactions (i.e. between equal entities), unregistered by any authorities, financial institutions or central banks. Anyone could create it themselves, i.e. “mine”, and the only price was the provision of their computer’s computing power.

We will write a lot more about the advantages of investing in cryptocurrencies (although, as with any financial instrument, there are also risks, which I will also discuss), this instrument does have one advantage of extraordinary importance from the point of view of investors: it protects against inflation. While governments and central banks can print money almost without restraint (which we witnessed not so long ago), cryptocurrency is, in principle, – like gold – a finite good. Satoshi Nakamoto announced that only 21 million bitcoins can be created and not one more.

Bitcoin and cryptocurrencies in general seem to be a revolutionary idea. And they are. But the flame of this revolution has been smoldering for many years.

Privacy first

Today, maintaining privacy in the digital world is one of the main topics of discussion accompanying the development of technology. And there is less and less of it – Internet users often recklessly sell their privacy on social media. The problem also concerns finances – every transaction is registered, and from their collection you can read everything about our preferences, interests or diseases.

It’s an obvious problem these days, but back in the early 1980s – when the internet was still in its infancy – it was noticed by University of Berkeley professor David Chaum, who pondered the problem of privacy in the digital world and laid the foundations for anonymous online payments.

In 1981, he published the article “Untraceable Electronic Mail, Return Addresses, and Digital Pseudonyms”, which set the stage for research on encrypted communication on the Internet. In the next article: “Blind signatures for untraceable payments” from 1982, he developed a solution enabling the implementation of an anonymous payment system.

In 1989, he founded DigiCash, a company that enabled anonymous payments. Thus, the great-grandfather of cryptocurrencies was born. The project introduced, among other things, blind signatures, which allowed signing data without revealing its content to the bank, which was to be the central point of the system issuing the currency, i.e. E-Cash. Coins were to be a unit of payment even outside the system, with entities that would accept it. However, the project was not successful, also due to the moderate interest from banks.

Secondly, decentralization

In Chaum’s concept, the central point of the system was still the bank. New technology was needed.

In 1991, the processes pioneered by Chaum were expanded upon by W. Scott Stornetta and Stuart Haber, two scientists who wanted to create a secure and tamper-proof method of time-stamping digital documents. The solution was to develop a chain of digital blocks secured by cryptographic mechanisms. These blocks contain digital information placed in a public database and are shared among different users without the need for intermediaries, allowing anyone to verify them.

This solution ensured both anonymity and security – the failure of one network node did not prevent the entire system from functioning, and with the available technology and computing power, it was impossible to counterfeit the largest blockchains.

This idea was used by the first creators of the cryptocurrency concept. In 1998, Nick Szabo, a well-known crypto computer scientist and cryptographer in the industry, designed a system that would not require the action of any central authority. It was to be a distributed ledger of transactions verified by users as part of Proof-of-Work – a consensus algorithm, also called proof of work.

The project was very similar to the modern bitcoin in concept. Its goal was to become a reserve currency or the basis for other digital currencies. Bit Gold remained only at the concept stage. Almost at the same time, a very similar project – b-money – was presented by Wei Dai.

In 2004, Hal Finney proposed his own digital currency system: Reusable Proofs of Work (RPOW), a slightly improved version of Adam Back’s earlier idea using the Hashcash proof-of-work mechanism (intended to be a safeguard against spam). Proof of Work introduced a digital representation of a scarce resource in the real world: energy. And since scarcity is a fundamental property of money, Back recognized that proof of work could potentially serve as the basis for an entirely new kind of currency: digital cash that would not require banks at all.

The mistake was that Finney accepted that there would be no immunity to inflation, assuming that as the computing power of the machines increased, the coins would be produced faster and faster. And without a financial incentive to hold RPOW tokens, there was no reason to accept them as payment. But no one was accepting the tokens, so there was no one to spend them.

Will crypto drive the world?

Satoshi Nakamoto used all these concepts. It is not known who he is (or was, because in 2011 he stopped communicating with the world), it is not even known whether he is an individual or an organization. When he announced the creation of bitcoin, the world was already ready for such a step technologically, but also the social mood was ripe for it. The market was licking its wounds after the great crisis, and the concepts of getting out of the collapse were undermining trust in the authorities and the financial system. For example, as part of the Paulson plan, the banks that were responsible for the crash received $700 billion so that they would not go bankrupt, although the authorities were no longer as generous to the customers of these banks.

The new currency slowly gained popularity. The first transaction was made in May 2010, when a member of the bitcoin community paid 10,000 BTC to deliver two pizzas.

The snowball started rolling – the price grew slowly, then faster and faster, and bitcoin turned out to be the most profitable asset. In 2016, the price stayed around $1,000. At the end of 2018, the price reached $20,000. Currently, it oscillates around $60,000.

Bitcoin’s success has spawned a huge market. There are currently thousands of virtual currencies in circulation. The most popular are Ethereum, Tether, Litecoin, and Ripple. Cryptocurrencies have also opened the door to decentralized finance—an idea that allows for the exclusion of controlling entities.

Based on automated, cryptography-based solutions, exchanges are emerging, both centralized (CEX) and decentralized (DEX), or cryptocurrency exchanges. There are also brands that combine more services under one banner.

An example is Kanga, which includes the Kanga Exchange, as well as stationary exchanges and the Kanga Local service. Within this, customers can exchange cryptocurrency for cash at a location convenient for them.

Finally – last but not least – cryptocurrencies have popularized blockchain technology. It is currently used to handle various commercial and financial transactions or in the electricity market to settle purchases and sales between its small producers, e.g. households, and their distributed recipients. Work is underway on the use of blockchains for digital signatures in state administration or as an accounting ledger in banking.

Cryptocurrencies have already started to change the world, and this revolution is only just beginning.

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