Hashcash: a Prerequisite to Bitcoin

Bitcoin did not just appear into existence. For years programmers worked on a digital currency that could be used in lieu of fiat money as we know today. Many were aware of the difference between "good money" vs "fiat money." The problem was how do we set up a system of "good money" and get people to use it and believe in it? In 1997, a British researcher, Adam Back, released on Cypherpunk mailing list his plan for something he called Hashcash. Hashcash was supposed to solve one of the most basic problems holding back the digital cash project: the seeming impossibility of creating any sort of digital file that can't be endlessly copied.

Back's concept made creative use of one of the central cogs of public key cryptography: cryptographic hash functions. These are mathematical equations that can become so difficult, only a computer will be able to solve them. In fact, the difficulty can become so hard, that all a computer could do was try out lots of different guesses with the aim of eventually finding the right answer. When a computer found the right answer, it would earn Hashcash.

This method was useful because it ensured that Hashcash would be scarce- a characteristic of most "good money" but not of digital files, which are generally easily duplicated. A computer had to perform lots of work to create each new unit of Hashcash, earning the process the name "Proof of Work." Proof of Work would later be a central innovation underpinning Bitcoin. The main problem with Back's systems as a digital currency, was that each Hashcash unit could be used only once and everyone in the system needed to create new units whenever they wanted to use any. Another problem was that a person with unlimited computing power could produce more and more Hashcash and reduce the overall value of each unit. These were some pretty serious limitations. For the time being, no one could figure out a way to create money without relying on a central institution that was vulnerable to failure or government oversight. However, even though Hashcash failed, many of its early concepts lead to the eventual groundwork to create Bitcoin as we know it today.

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