Within the cryptocurrency community it is considered common knowledge that there was nothing before Bitcoin. So it might surprise you to know that in reality cryptocurrency technology stretches all the way back into the 1980s. Almost as long as there have been microcomputers there has also been a cryptocurrency scene, a scene which originated jointly from a group of European computer scientists and an eccentric American named David Chaum.
If Satoshi Nakamoto is the Jesus of cryptocurrency then David Chaum is God. His story is the Old Testament of the cryptocurrency world, representing a wholly similar paradigm that is distinct, but also deeply connected to the one we are currently in.
Blinding Formula and the Dutch Connection
Way back in the early 1980s, while Chaum was studying computer science at Berkley, he invented something called the Blinding Formula. This formula allows an entity to send an electronic number (Chaum actually called it a ‘coin’) to someone else who can then modify it and send it somewhere else. Although the coin is able to be modified, it always keeps its original signature determining who ‘issued’ it. So the formula allows participants to move something that has been issued without invalidating the ‘makers mark’ or ‘certificate of authenticity’, however, it prevents the issuer from being able to see who has the coin or where it has been sent. In this way Chaum’s coin is cryptographic.
While Chaum was perfecting his formula, far away in Amsterdam there had already been something of a cryptocurrency experiment.
Amsterdam is a port and therefore many cargo trucks move in and out of it to collect expensive products that are unloaded from merchant ships. The truck drivers spend a lot of money on fuel and so Amsterdam gas stations were always stocked with lots of cash. In the remote areas surrounding the city, gangs of robbers had been regularly sticking up gas stations and the authorities needed to do something about it. They came up with the idea of putting electronic money onto newly invented smart cards and issuing the smart cards to drivers so that they could pay at the gas stations with those instead of cash. This would mean there would be no cash in the gas stations for the robbers to take. The experiment was a success and generated some press coverage; it also led to a lot of computer-based financial innovation at the hi-tech Amsterdam Science Park.
When Chaum heard what had happened he saw his chance to shine and jumped on the next flight to Holland where a cryptography and mathematics research company called CWI gave him a job. He worked there for some years learning what he could.
By the late 1980s, Chaum felt knowledgeable enough to branch out on his own and started a company called DigiCash which can be considered the first cryptocurrency company. It focussed on electronic money and even had an internet-based product called Ecash, among its employees was a very young Nick Szabo.
Success and recognition
The company was initially successful and became very famous in the tech industry. The company’s flagship product ‘Ecash’ was often described as a perfect anonymous transaction system for the internet. Many Americans flew to the Amsterdam Science Park to study the way that the company operated. It is said that the laid back liberal atmosphere there and the European employees’ refusal to wear suits was a major influence on the deconstructed Silicon Valley corporate culture of today.
By all accounts Chaum was a charismatic leader with an interesting management style, but he refused to compromise his artistic vision in any area against the best advice of his employees. He was suspicious of everyone and ‘paranoid’ with a habit of suddenly changing his mind without warning. At one time, Microsoft had offered DigiCash $180 million to allow them to preinstall Ecash software on Windows computers and the deal was on the verge of completion, but Chaum suddenly decided that his product was worth more and the deal collapsed. If the deal had gone through, cryptocurrency would now be as ubiquitous as Internet Explorer.
Several other huge deals failed to get off the ground due to irreconcilable differences. Opportunities to partner with Deutsche Bank, Netscape and Visa were thrown by the wayside. Chaum had insisted that everyone in Netscape sign non-disclosure agreements before negotiations had even begun, Netscape bailed out in disgust. Visa offered to invest $40 million in the company, but when Chaum suddenly insisted on $70 million they told him to ‘get lost’. There was another deal with major card companies ready to be signed, but Chaum suddenly decided it would be a good idea to tell the press that their smartcards were broken and insecure; the banks immediately pulled the plug. Then Holland’s central bank began to put the squeeze on. They forced DigiCash into a position where it could only sell its digital currency to banks. This situation became unworkable and the company began to decline.
Mutiny against Chaum
It is said the decline was partly due to Chaum being a ‘control freak’ and wanting to micromanage every aspect of his company. He also expected a lot of work from his employees for little reward, which led to good workers leaving because they felt they weren’t being recognized or properly compensated. Chaum always promised a ‘big deal’ on the horizon which never came, and when partnerships with big companies did approach, he would burn bridges and upset them so much that they would tell him to forget it. Eventually 11 employees got together and held a meeting in which they forced Chaum to leave the company. He returned to California.
Failure of new management and bankruptcy
Chaum was replaced by a former Visa manager Michael Nash, an American who unlike Chaum had little love for European business philosophies. He opened an office in Silicon Valley right away, an act which the Dutch programmers took great offense to. The American programmers who replaced them at the new offices wanted higher salaries for inferior work and did not believe in the product to the same religious degree. In Europe the team had not been motivated by profit but the belief in creating an amazing product above all else, in the Nash era that ethos was gone. The new salaries and way of working soon led to the company losing money every single month.
Rescue deals with Citibank and Credit Suisse fell through, and in 1998 DigiCash finally went bankrupt. David Chaum is said to have been seen wandering around Berkley looking miserable for many years following the company’s collapse.
What can we learn from DigiCash?
The most amazing thing about the history of DigiCash is that it is very similar to the cryptocurrency scene of today but set in the 1980s and 1990s. The technology was similar to Bitcoin but the company resembles Ripple Labs and their attempts to engage the financial industry.
It seems clear that if the company had not made mistakes and the time had been right the cryptocurrency revolution could have happened decades ago, especially since at that time the establishment was far more receptive. Perhaps when we consider this history we can better understand the apprehensions banks feel about cryptocurrencies, it is possible that they remember the days of DigiCash and simply do not want the hassle.
The difference between the DigiCash and modern cryptocurrencies is that DigiCash relied on a central power, while Bitcoin is decentralized, perhaps that will create a different outcome.
‘You know, I think there were a lot more people interested in the 90’s, but after more than a decade of failed Trusted Third Party based systems (Digicash, etc), they see it as a lost cause. I hope they can make the distinction that this is the first time I know of that we’re trying a non-trust-based system.’