Bitcoin was not the big bang, something came before.

eCash

In the early 1980s David Chaum devised a means of payment that protected personal data from financial institutions and merchants, eCash

How eCash worked

1. A bank customer would download some software which they could use to generate, say, a $1 digital coin with a unique serial number.
2. The bank would in turn affix their sign to the coin and debit the customer’s bank account by $1.
3. To buy something, customers simply transferred the coin to the merchant who accepted eCash.
4. To protect the customer’s anonymity, Chaum introduced a technology called “blind signatures.” that the bank that had signed the coins would not be able to access those coins’ serial numbers, and thus could not match them to a specific person.

One problem with digital cash is that it was simple for users to replicate.

Simply copy a $1 digital coin and you have got $2 of them. This is the double-spending problem. Banknotes are not susceptible to double-spending because of constantly evolving security features like watermarks and holograms, it is difficult to make cost-effective replicas.

As for deposits, because bankers closely guard the ledger that tabulates account entries, it is difficult to hack in and double or triple-up one’s balances.

eCash solved the double spending problem by having the issuing bank maintain a database of the serial numbers of all already-spent coins.

When the customer spent a $1 coin signed by a certain bank, the merchant would call up that bank and provide the coin’s serial number. The bank would check its database to ensure that the coin had not been spent. If the number was there, the coin was not spendable, otherwise the transaction was free to proceed.

eCash was unable to compete against credit cards as the sufficiently trustworthy form of payment over the Internet. Chaum’s company, Digicash, went bankrupt in 1999, ten years before Satoshi Nakamoto debuted bitcoin.

E-Gold

In 1996, Douglas Jackson opened E-Gold, it was a service that offered customers fully-backed gold deposits transferable over the Internet. These were not strictly bearer money since the customer had to open an account in order to be able to own e-gold.

In practice, however, e-gold offered a degree of anonymity since it was easy for users to set up accounts using pseudonyms. In 2005 the FBI, concerned about the use of e-gold by criminals who trafficked in stolen credit/debit card numbers, raided E-gold premises. Jackson was indicted on charges of money laundering, conspiracy, and operating an unlicensed money transmitting business.

Then came bitcoin

Satoshi Nakamoto wanted to design a system that resolved flaws while preserving the anonymity, finality, and censorship resistance of bearer money.

In a 2008 white paper, published online, Nakamoto says that the problem with previous attempts at digital money

“…is that the fate of the entire money system depends on the company running the mint, with every transaction having to go through them, just like a bank.”

and later in an online post

”…a lot of people automatically dismiss e-currency as a lost cause because of all the companies that failed since the 1990s. I hope it’s obvious that it was only the centrally controlled nature of those systems that doomed them.”

Nakamoto’s devised decentralization, a protocol that has no central points of control. There is no third-party database to record serial numbers so as to ward off double-spending attacks. The task of validating and recording transactions is outsourced to a distributed network of anonymous computers running Bitcoin software, these are ‘nodes’. There is no central mint and no e-gold server that issues and redeems tokens.

It took the broad success of peer-to-peer music file sharing networks like Napster and Kazaa to give a new model for Bitcoin’s distributed design. Rather than hosting music on a central server, Napster provided a directory that allowed users to connect to a network of peers who had songs available for download on their personal computers (nodes). Because there were millions of nodes it was difficult, though not impossible, for authorities to censor the network. 

This was a brief and woefully incomplete history of the beginning of the beginning.

Whatever happens to bitcoin, this will only be the beginning of the middle.

The End?