The complete history of cryptocurrency

Cryptocurrency is maturing. But how did we get here? How is our future being guided, and from what vortex does this new understanding of value emerge? Onomy Protocol lays out the complete history of cryptocurrency below.

Hash and peer-to-peer electronic cash system

Hash, generally translated as hash, hash, or transliterated as hash, is to transform an input of any length into an output of fixed length through a hash algorithm. The output is the hash value. At the beginning, there was hashing, which grinds any set of data into an encrypted output, connecting each block to the backbone of the block. Miners verify each block by solving the hash issued by each block, thereby proving that the previous block is accurate.

Satoshi Nakamoto believed that these connected blocks could be used for direct peer-to-peer currencies, whose governance and authenticity could be supervised by a decentralized and widespread network of computers, thus breaking away from the control levers that national governments have on typical fiat currencies. In 2008, Satoshi Nakamoto published a paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System", which described an electronic currency he called "Bitcoin" and its algorithm.

Crucially, it would also solve the double-spending problem through its proof-of-work mechanism, which also ensured the mathematical "impossibility" of corrupting the transaction ledger. It would be a people's currency, overseen by all who participated and could never be manipulated. Thus was Bitcoin born, and the cryptocurrency era—a vast neon arcade, technological maze, and once-in-a-lifetime gold rush—began.

The birth of the genesis block

The first block to be constructed is called the Genesis Block, which has a unique ID number. In addition to the Genesis Block, each subsequent block contains two ID numbers, one is the ID number of the block itself, and the other is the ID number of the previous block. Through the forward and backward pointing relationship between the ID numbers, all blocks are connected in order to form a blockchain.

In 2009, Satoshi Nakamoto released the first Bitcoin software and officially launched the Bitcoin financial system. On January 3, 2009, Satoshi Nakamoto created the first block on a small server in Helsinki. Satoshi Nakamoto mined the Bitcoin Genesis Block and signed it with: "The Times January 3, 2009, Chancellor on the verge of a second bailout for banks", highlighting some of the financial turmoil that inspired him to invent Bitcoin and officially launched the Bitcoin network.

In 2010, he stepped down and handed over the project to other members of the Bitcoin community. Satoshi Nakamoto is believed to hold about one million Bitcoins, which were worth more than $40 billion at the end of 2021.

How Bitcoin Became a Port in a Financial Storm

The aggressive fiscal leverage used to mitigate the 2008 crisis has never stopped. In the past two years, the Federal Reserve has printed more than half of all U.S. dollars. Satoshi Nakamoto designed Bitcoin to have both deflationary features and a full-reserve (rather than fractional-reserve) system. Since there are only 21 million Bitcoins available, the money supply has a hard-coded end. What's more, each block becomes increasingly difficult to mine.

Bitcoin proponents argue that this creates a dual stability, where people's wealth is not eroded by the fiat of the state, money is not created by magic, and all wealth is lent out with the conscious consent of the wealth owner, rather than as it is now, where your $100 is used as collateral by a bank, borrowed for $1,000, and then used to bet on Indonesian housing futures, or something like that. The second stability is decentralization. With Bitcoin, no chancellor of the exchequer can unilaterally adjust the money supply.

Decentralization, and a monetary system that works without going through a financial institution, is the second great innovation of cryptocurrencies. It is this innovation that has given rise to thousands of new use cases. If we can decentralize money, what else can these distributed ledger technologies be used for? Evidence suggests that much of this is still being worked on, but we will see some examples later on of how cryptocurrencies are evolving to encompass a wide range of possibilities that go far beyond value transfer.

Decentralization is also a source of crypto’s libertarianism. It’s no secret that some of its biggest early proponents, including Satoshi himself, were strong advocates for reducing the role of the state in individual lives.

With the birth of Bitcoin, we have the cryptocurrency market. It consists of things like smart contracts and the metaverse where geek kids become huge winners and even dice throwers get huge gains, but to what end?

Fortunately, we have moved on from the casino narrative. Cryptocurrencies are constructing a new social contract, a new way to distribute value among all of us, and in so doing, rearrange social bonds and the overseers who govern them by creating a “peer-to-peer electronic cash system.”

Buy Pizza, Gamers and Holders

The early days of crypto were filled with smart money, HODLers, and people who just wanted to visit Silk Road, buy game items, or hack. The real early adopters, though, were the consumers. Amid all the laughter, the guy who spent 10,000 Bitcoin on two pizzas did far more for the development of the crypto market than any whale investor today.

There are many stories of lost cryptocurrencies due to burned hard drives, forgotten seed phrases, etc. Some of these are now worth hundreds of millions of dollars. There is this sad story of a man whose hard drive ended up in a landfill and who offered to share half of his funds if it could be found. So far, Parliament has refused to let him search. The libertarian ethos of crypto means giving personal agency to your funds in the form of private keys. In fact, the attrition effect was built into the deflationary model from the beginning, with lost currency driving the overall price up.

The term HODL originated from a typo on an early Bitcoin forum. A man who had run out of luck after a hard day at work got drunk and smashed his keyboard in a lemming move in the early days of Bitcoin. Not only did he create a meme, but he also gave sage investment advice that has penetrated the consciousness of many young people who buy and invest in cryptocurrencies today. Despite the huge volatility and trader bros, cryptocurrencies have a strong retail investor base that is happy to hold on to their coins and enjoy the occasional 10,000% return.

Early Trading, Exchanges, and the Mt Gox Hack

Buying and selling Bitcoin was difficult in the early days. If you weren’t mining it yourself or earning it by doing surveys on random websites, you either wired your money to an anonymous PayPal and hoped to get Bitcoin in return (which, to be fair, you almost always did) or used an exchange.

Centralized exchanges are somewhat at odds with the original vision of cryptocurrency as a peer-to-peer exchange mechanism with no financial institution in the middle. CEXs hold custody of your cryptocurrency (or your fiat) and allow you to buy and sell cryptocurrency at instant speeds. This opens the door to the more familiar day trading, speculation, and options trading you see in traditional markets.

Many see no problem with CEX if you can trust it. Others would say if Satoshi Nakamoto was truly dead, he would be rolling in his grave. However, a cruel reminder of the importance of self-custody of your wealth on-chain comes.

Mt Gox was the largest Bitcoin exchange. It started in 2010, and by 2013 it was handling 70% of all Bitcoin transactions worldwide. Prior to this, Bitcoin itself was in one of its biggest bull runs, and Mt Gox was the destination for trading. The future was bright.

Until the hack. The whole point of handing over your keys is that while you are trusting them, you have to trust that they will keep the keys for you and are prepared for anything that might happen. In the case of Mt Gox, they were not. Their user database was compromised and the hacker began buying Bitcoin for as little as 1 cent by manipulating the exchange’s central computer. The hacker also stole Mt Gox’s central account and burned the coins by sending a large amount to a non-existent address. Mt Gox rushed to recover the funds in time, but it was too late.

Thousands of users lost their investments, and the price of Bitcoin collapsed on the back of the incident — people lost trust in the ability to trade securely, especially considering how popular and important Mt Gox was on the trading scene at the time. This was the first major “crypto winter,” when confidence in the market was still young and the overall collapse was a severe blow to early cryptocurrency adoption.

The rise of stablecoins

The perpetual volatility of early crypto markets, and the confidence friction created by trying to trade assets with daily price fluctuations, led to the need to somehow store crypto value in a notional “peg,” a holding currency that would allow people to move assets to a safe store of value without the need to “exit,” i.e. convert crypto assets back into fiat.

Tether is the first widely adopted stablecoin and the largest stablecoin by market cap to date. Tether's goal is to create a reserve-backed cryptocurrency where each issued token has a corresponding real-world asset — like a stock, bond, or fiat currency — to back its redemption value. Tether has proven to be very popular and was a major catalyst for the creation of a more robust trading market for early cryptocurrency exchanges.

Since Tether’s inception, and the emergence of alternatives like USDC and BUSD, there have been other movements aimed at creating a “pegged” value cryptocurrency that does not require fiat backing and retains the spirit of decentralization. Prominent examples include MakerDAO, which uses various crypto collateral to issue DAI, a token pegged to the U.S. dollar, and TerraLuna, which has established a minting and burning algorithmic link for its stablecoin UST with LUNA (its collateral currency).

Ethereum: Smart Contracts, Oracles, and Decentralized Exchanges

Ethereum is considered the dawn of the second wave of crypto adoption. Building on the work of Nick Szabo, who proposed the concept of smart contracts in 1994, Vitalik Buterin and his men developed Why should decentralized, trustless ledgers only be used for cash? The ability to generate trust through random parties through a trustless network, and having the blockchain save data in such a way that if certain prerequisites of the arrangement are met and their authenticity is verified by the blockchain, then a "contract" can be formed as a result - without the need for third-party enforcement.

The concept opens the door to complex arrangements, such as raising money for a specific goal without having to hold the money in a third-party escrow account or having to trust that preconditions have been set. In reality, the Ethereum Virtual Machine (EVM) is a massive decentralized supercomputer that processes complex contracts on a distributed ledger.

Smart contracts transform blockchain and distributed ledger technology from simply “money” to something much more complex. With smart contracts, the possibility of more complex financial instruments existing on the blockchain becomes a reality. Ethereum is the first major cryptocurrency to implement this as part of its codebase. The feature means that, instead of a single function of transactions, blockchains can host DApps — decentralized applications can perform a wide range of operations, as long as their contracts and tokens meet established standards.

This includes, but is not limited to, decentralized value exchange, gaming ecosystems, and art verification (in the form of NFTs). It also opens the door to yield-generating tools, and with it, DeFi was born — but its full functionality will take several years to unlock.

The scars of the Mt Gox hack have made people more acutely aware of the importance of on-chain transactions. With smart contracts, decentralized exchanges (DEXs) are possible. Smart contract technology can be used to create automated market makers (AMMs). By creating "liquidity pools," a pair or group of tokens whose price is adjusted based on the ratio of the two in the pool, users can trade without a central authority.

These on-chain transactions return cryptocurrencies to the vision of "peer-to-peer" value exchange, while also giving token holders the opportunity to become market makers themselves and earn yield on their tokens, opening up the possibility of financial instruments that have made institutions enthusiastic about crypto in 2022. Like the early pioneer Uniswap, DEXs are not without problems. Ethereum's smart contracts and the ERC-20 standard that underpins this activity are expensive to use, and the lack of gatekeepers (anyone can create a pool) means that anyone can create a token and sell it.

Nonetheless, for many in the crypto space this is a much better way to trade, and once DEXs are able to offer this functionality at a lower price point while also providing the order book functionality of an exchange, then a full migration away from CEXs will occur, bringing billions of people into crypto.

Smart contracts require data to execute. On-chain data is relatively “easy”, you can simply read another smart contract and input the data - as long as it meets the standards of the blockchain. What is more difficult is to put “off-chain” data on the blockchain in the same trustless, decentralized way as cryptocurrencies.

If you have a smart contract that triggers appropriately when a horse race winner arrives, or when the weather reaches a certain temperature, it’s much harder to do this. How can you trust this information? This is where “oracles” come in. Oracles are networks of computers that collaborate to verify off-chain information and enter it into the blockchain.

Despite these advances, they were still in their infancy in 2017. At the time, people were still buying into Bitcoin, and their “magic internet money.” Bitcoin’s extraordinary investment returns from less than $1 to more than $22,000 between 2009 and 2017 led to a flood of copycats, which subsequently triggered the second crypto winter.

The ICO Boom and the Birth of Meme Tokens

ICO or Initial Coin Offering is a process whereby cryptocurrencies are minted (known as a Token Generation Event) and then sold to the public through a website or other portal. Bitcoin’s lucrative returns have many retail investors looking for the “next big thing.” It didn’t take long for a large number of tokens to be released, sparking a token craze through the media, forums, and more.

The difference is that instead of being mined over time, these tokens were dumped onto the market in large quantities. Notable examples like Waltonchain, Big Brain Chain, and Verge whipped their supporters into a frenzy to replace Bitcoin as the “money of the future.” The frenzied hype that accompanied these offerings led to dizzying rises as — egged on by their favorite internet celebrities — retail consumers sought out the “next Bitcoin.” In 2017, there was the “ICO boom.” Mainstream interest in cryptocurrencies reached a fever pitch in 2017.

The ending, of course, was a tearful one. While the technology of these blockchains was often on par or better than Bitcoin (the dirty secret of crypto is that it’s not that hard to create a simple, working currency in a few weeks), there was no principle behind them. Their early token supplies were often held by a select few individuals who either created the project or hyped it up, then dumped their tokens on the retail market. The massive unhappiness and pain this caused in the retail market did serious damage to the confidence many had in this bright new technological innovation, and created a distrust of cryptocurrencies that persists (rightly to a certain extent) to this day.

Meme tokens—coins with no “intrinsic value” (whatever that actually means) but that exploit the human ability to laugh at ourselves—are still around today. Some are benign, a simple joke that people can buy to share. Others are carefully designed to defraud any unsophisticated investor who comes across them. And others, like Dogecoin, are simply created to prove a point or “a joke,” with rampant inflation built into the token as the apparent antithesis of Bitcoin’s deflationary economics.

Of course, the Metaverse is not without its ironies, with Dogecoin having soared in popularity since its introduction in 2013. Its success remains. In 2022, it remains a top twenty cryptocurrency and has spawned a slew of altcoins (some of which, like Shiba, have become hugely successful). Of course, Doge wouldn’t be where it is now without cheerleaders like Elon Musk. Sadly, the lessons it was trying to teach us are not. To this day, nefarious “vote solicitation” like the Squid Game token continues unabated in the crypto markets, with investors finding themselves unable to sell their tokens while founders become wealthy.

ICOs are not commonly used today. The potential for manipulation is too great. There are all sorts of new ways to supply money to the market. IDOs, IEOs, and airdrops to users have emerged. With IDOs, tokens are sold at a specific price and then pools are set up on decentralized exchanges where users can interact, quickly establishing a fair market price for the new token. IEOs hand over control of the sale to CEXs, which hold liquidity to ensure the token sale goes smoothly. Airdrops are when active users of a protocol receive tokens for free, putting them into circulation, the most notable of which is Uniswap's airdrop to users who have used DApps.

DeFi and Layer 2 Technology

After the ICO boom and the damage it caused, and Bitcoin’s plunge from a high of $22,000 to a low of $3,000 in 2017, public interest in the crypto market cooled. The media still cast crypto as a “scam” (after the ICO boom, and for good reason), and the mainstream view was that Bitcoin’s time was over and cryptocurrencies were going away.

DEXs, oracles, and smart contracts began to develop rapidly between 2017 and 2019. Bitcoin, despite a significant drop in the value of the asset, began to climb again during these two years — albeit slowly, as the crypto community got used to the new technology and started to get better at using it.

Nowhere is this more evident than when DeFi (decentralized finance) entered the crypto market. If cryptocurrencies can replace cash, why not just replace the entire banking system as well? That’s the idea behind DeFi, where a decentralized network of users can become banks — collaborating to issue loans, credit, and financing to projects with the goal of earning interest.

The economic efficiency of blockchain creates a way to raise funds without the huge waste implicit in the international banking network, thereby unlocking more returns for lenders, better savings rates for depositors, and better interest rates for borrowers. Instead of being afraid of this emerging technology, institutions are beginning to notice that their own asset pools can be outsourced more efficiently due to these advances in blockchain technology. 2020 was the year of DeFi, and many believe that this innovation has driven Bitcoin to its all-time highs in 2021, and it remains the flagship currency of the crypto market and a market driver.

DeFi is still evolving. The current talk of "Defi 2.0" has been criticized. The original DeFi projects used efficiency to offer incredible yields, and more recent DeFi projects have offered users thousands of APY percentages. There is no efficiency if the money is not spent. There is a real concern that the new so-called DeFi schemes and their yield farms are nothing more than glorified Ponzi schemes dressed up as blockchain.

A matter of scale

However, the resulting strain on the Ethereum network was catastrophic — and largely “locked out” modest investors from the possibilities of DeFi. This was due to the expensive gas fees on Ethereum, and the fact that the transaction speeds of this ancient monolithic architecture were completely unsuitable for the sharp world of finance. This, in turn, led to a proliferation of layer 2 protocols. These protocols aim to increase transaction speeds and reduce the cost of using Ethereum by moving transaction volume off-chain.

There are many ways to do this, all with varying degrees of success. Second-layer chains like Polygon and Arbitrum are touted as the savior of Ethereum, as Ethereum is currently in a position where it breaks down in general use when demand and usage surge. Layer 2 solutions attempt to eliminate the main pain of Ethereum mainnet verification by using “sidechains.” The sidechain calculates all transactions and securely verifies their authenticity, then sends them to Ethereum for verification within a block.

So far they have been successful, but we have recently seen entirely new layer 1 chains built on different architectures and therefore able to efficiently compute large volumes of transactions without relying on additional layers.

The rise of Layer 2 is a direct response to the “Blockchain Trilemma” coined by Ethereum founder Vitalik Buterin. In short, the trilemma states that Ethereum can have two of the characteristics of scalability, security, and decentralization at the same time - but not all three, because adding scalability (in a decentralized way) puts security at risk. Most projects using current technology are focused on two of the three - blockchain's Layer 2 solutions help scale secure, decentralized blockchains, thereby enhancing their utility without sacrificing.

Of course, in order to deliver on the promise of Ethereum, a “secondary blockchain” is needed, which has led to competitors trying to replace Ethereum by solving the trilemma. These “ETH killers” try to create layer 1 solutions that solve the blockchain trilemma without the need for a layer 2. Prominent examples include application-specific blockchains like Cosmos, which are built for a clear purpose and are therefore able to adapt to the needs of any protocol, or the well-known NEAR, Avalanche, Solana, which rely on different consensus and scalability mechanisms such as sharding, subnets, and proof of history.

Some argue that Ethereum remains the only institutional chain, while other L1s are only for retail traders looking to escape high fees. We believe that in the future, most blockchain ecosystems are interconnected via bridges, inter-chain transactions and cross-chain asset storage become the norm, and the chain you interact with will become less important.

NFTs and the Metaverse

If 2020 was the year of DeFi, then 2021 is the year of the NFT. The ability to “mint” a work of art — that is, generate an ownership code that can remain immutable on a blockchain — has taken many by surprise. NFTs are the first wave of tokenized asset holdings, moving beyond simple “fungible” assets like currency into a more nebulous category. With the ability to write ownership of anything imaginable into a blockchain — regardless of the “real world” value it may have — it has given rise to a new concept of cryptocurrency as an opportunity to tokenize a variety of different initial asset classes, which has led to a new speculative gold rush similar to the one seen during the ICO boom.

Because that’s probably what the future holds. While still speculative, the “metaverse” — first coined in Neal Stephenson’s legendary cyberpunk novel Snow Crash — will create a stage for NFTs to flourish. Their ability to represent avatars, virtual land, and video game skins creates a new way to put value into the hands of cryptocurrency users. Play-to-Earn games are a new trend that promises to use NFTs and the ownership they confer to create value for people who spend time in the ecosystems they support.

Multi-chain, cross-chain

Vitalk says the future is multi-chain, not cross-chain. Others will strongly disagree. The fact remains that blockchains don’t talk to each other very well. The next challenge for cryptocurrencies is to be able to more efficiently connect information (or data value) between the large number of blockchains currently on the market. By creating efficient, secure bridges, the opportunity for exponential growth is clear as blockchain utilities are effectively paired.

If these bridges were centralized, Web3’s ability to remain user-friendly would be threatened and would create a single point of failure attack vector. However, decentralized bridges where the responsibility for data value transfer is widely distributed can lead to a healthy cross-chain blockchain economy.

What’s next?

People have talked at length about the moment when cryptocurrencies gain “mass adoption,” where speculation meets real-world usage and cryptocurrencies become a fundamental pillar of our daily lives. We’re not there yet, but we’re getting very close.

We believe the golden opportunity for mass adoption is within our grasp. First, DeFi can shake up the tilted FX market and provide a way to trade foreign currencies on-chain, opening up new ways to interact with your capital. Second, a decentralized user experience that outperforms centralized enterprises while providing custody of own funds, efficiency, on-chain trading, and support for advanced features. Then, we need a better wallet. Not one per blockchain, but one for all blockchains, with all assets stored on any chain. Only then can we expect the world’s trillions of dollars to flow into DeFi, unlocking new opportunities for the unbanked and driving out legacy institutions that refuse to evolve. Think of it as the Golden Ratio, the ultimate formula that equals success regardless of external pressures.