Just asÂ understanding the concepts of distributed systems is necessary in order to understand blockchain technology, the idea of electronic cash is also essential to appreciate the first and astonishingly successful application of blockchain: the bitcoin, or broadlyÂ cryptocurrencies. Theoretical concepts in distributed systems such as consensus algorithms provided the basis of the practical implementation of Proof of Work algorithms in bitcoin; moreover, ideas from different electronic cash schemes also paved the way for the invention of cryptocurrencies, specifically bitcoin.

In this section, the reader will be introduced to the idea of electronic cash and then various other concepts that existed before cryptocurrencies that led to the development of bitcoin are presented.

The concept of electronic cash

Fundamental issues that need to be addressed in e-cash systems are accountability and anonymity. David Chaum addressed both of these issues in his seminal paper in 1984 by introducing two cryptographic operations, namely blind signatures and secret sharing. These terminologies and related concepts will be discussed in detail in Chapter 3, Cryptography and Technical Foundations. At the moment, it is sufficient to say that blind signatures allow signing a document without actually seeing it and secret sharing is a concept that allows the detection of using the same e-cash token twice (double spending).

After this other protocols emerged such as Chaum, Fiat, and Naor (CFN), e-cash schemes that introduced anonymity and double spending detection. Brand's e-cash is another system that improved on CFN, made it more efficient, and introduced the concept of security reduction to prove statements about the e-cash scheme. Security reduction is a technique used in cryptography to prove that a certain algorithm is secure by using another problem as a comparison. Put another way, a cryptographic security algorithm is as hard to break as some other hard problem; thus by comparison it can be deduced that the cryptographic security algorithm is secure too.

A different but relevant concept called hashcash was introduced by Adam Back in 1997 as a PoW system to control e-mail spam. The idea is quite simple: if legitimate users want to send e-mails then they are required to compute a hash as a proof that they have spent a reasonable amount of computing resources before sending the e-mail. Generating hashcash is a compute intensive process but does not inhibit a legitimate user from sending the e-mail because the usual number of e-mails required to be sent by a legitimate user is presumably quite low. On the other hand, if a spammer wants to send e-mails, usually thousands in number, then it becomes infeasible to compute hashcash for all e-mails, thus making the spamming effort expensive; as a result this mechanism can be used to thwart e-mail spamming. Hashcash takes a considerable amount of computing resources to compute but is easy and quick to verify. Verification is performed by the user who receives the e-mail. Hashcash is popularized by its use in the bitcoin mining process. This idea of using computational puzzles or pricing functions to prevent e-mail spam was introduced originally in 1992 by Cynthia Dwork and Moni Naor. Pricing function was the name given to the hard functions that are required to be computed before access to a resource can be granted. Later, Adam Back invented hashcash independently in 1997, which introduced the usage of computing hash functions as PoW.

In 1998 b-money was introduced by Wei DaiÂ and proposed the idea of creating money via solving computational puzzles such as hashcash. It's based on a peer-to-peer network where each node maintains its own list of transactions.

Another similar idea by Nick Szabo called BitGold was introduced in 2005 andÂ also proposed solving computational puzzles to mint digital currency. In 2005 Hal Finney introduced the concept of cryptographic currency by combining ideas from b-money and hashcash puzzles but it still relied on a centralized trusted authority.

There were multiple issues with the schemes described in infeasible preceding paragraphs. These problems range from no clear solution of disagreements between nodes to reliance on a central trusted third party and trusted timestamping.

In 2009 the first practical implementation of a cryptocurrency named bitcoin was introduced; for the very first time it solved the problem of distributed consensus in a trustless network. It uses public key cryptography with hashcash as PoW to provide a secure, controlled, and decentralized method of minting digital currency. The key innovation is the idea of an ordered list of blocks composed of transactions and cryptographically secured by the PoW mechanism. This will be explained in more detail in Chapter 4, Bitcoin.

Looking at all the aforementioned technologies and their history, it is easy to see how ideas and concepts from electronic cash schemes and distributed systems were combined together to invent bitcoin and what now is known as blockchain.

This can also be visualized with the help of the following diagram:

The various ideas that helped with the invention of bitcoin and blockchain