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Hi, I'm Jeremy Clark.

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I'm an Assistant Professor at
Concordia University in Montreal.

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Today's lecture is on
the history of cryptocurrencies.

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We'll look at all the technologies that
led up to the invention of Bitcoin.

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Now understanding the history of
cryptocurrencies isn't essential to

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understanding how Bitcoin works.

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Thus, it wasn't part of
the original lecture series.

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However, enough people thought that
it would be an interesting subject to

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look at, that we decided to release this
as a bonus lecture to the original series.

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In this lecture we'll look at the history
of electronic payment systems.

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These will include digital cash proposals,
and

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broader proposals that tie in
to the credit card network.

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We'll also look at the history of certain
primitives that Bitcoin uses that aren't

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directly related to e-cash.

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We'll look at proof of work protocols, and

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we'll look at secure
time stamping schemes.

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Finally, at the end of the lecture,

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we'll reflect a bit on what we
can learn about Satoshi and

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what he understood from the history of
cryptocurrencies in the design of Bitcoin.

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Spoiler alert,
we won't tell you who Satoshi Nakamoto is.

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The path to Bitcoin is littered with many
failed attempts at e-cash systems and

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other credit card payment systems.

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Here's about 100 schemes that
are notable in some regard.

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Some of them are academic proposals
that have been well cited,

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others are actual systems that
were deployed and tested.

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Of all the names on this list, there's
probably only one that you recognize.

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That's PayPal.

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It's the only current
system that we have from

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the history of cryptocurrencies
that's still bring used today.

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In this portion of the lecture, we'll look
at traditional financial arrangements.

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We're not going to give you
a full history of cash, and

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the assent of money, and all the things
that went into the invention of cash.

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But we will look at some of
the basics just to remind ourselves.

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They will help us understand the different
types of proposals that we'll see.

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If we rewind in time and go back to
a time before there was a government,

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before there was currency.

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One system that worked for
acquiring goods was barter.

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In a barter arrangement
you may have two people.

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For example, here we have one
person who wants to have a tool.

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And we have another person
that needs medicine.

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Now, if each of these has
what the other person needs,

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then they can do a swap, and
they can both satisfy their needs.

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For example, this person can give
medicine to the second person, and

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the second person can
give a tool in return.

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Now, the problem with barter is,

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what happens when the two people
don't have what the other wants?

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In this case, for example,
we might assume that this person has food,

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which they're willing to trade for
a tool that they want.

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The other person has a tool but

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they don't have any need for
food, they want medicine instead.

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This situation can be resolved with
the introduction of new parties.

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For example,
let's assume that there's a third person.

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This person wants food, and
they have medicine available,

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that they're willing to trade for food.

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In this case,

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it's possible to arrange a three way
swap where everyone gets what they need.

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Now, the drawback of a barter
based system is coordination.

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It's hard to coordinate all three people
to have them at the same place, but

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also to situate them in time,
where everyone's needs and

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wants align in time so
that they are able to complete the swap.

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In order to deal with
this draw back of barter,

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one of these two systems
emerged to replace it.

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One system is credit.

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One system is cash.

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It's currently a subject of academic
debate which of the two emerged first.

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For the purpose of this lecture we
don't really care about that debate.

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In a credit based system, we can assume
that the first person, for example,

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who needs a tool, they're able to
acquire the tool from another person.

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However, they don't have
the medicine that this person wants,

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all they can offer is food.

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Since this person doesn't want food,
the arrangement could be

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that they still make the trade,
the first person gets the tool.

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But the second person gets a favor
that's owed to them in the future.

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In other words, this person has a debt

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that they need to settle with this
person in the future sometime.

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Now, we can say that this
person's needs are satisfied.

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She acquired the tool that she wants.

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But really she has a new need
as a result of this arrangement.

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She has a debt and she would at some point
like to cancel that debt in the future, so

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that's her new want.

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Now, she can at some future time,
she may come across a third person.

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And in this case the third person
wants food, which she has.

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The third person is offering medicine and

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if she remembers that medicine is
what the person she has a debt with

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wanted to acquire, then she can
trade her food for the medicine.

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And then when she has the medicine,
she can go back to the original person and

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cancel the debt.

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As a result, everybody's happy.

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A second alternative we can look
at is the cash-based systems.

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In this case, we'll assume the same
scenario, except for in this case we'll

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assume that this person also has some
money, something of monetary value.

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In this case,

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when this person wants to acquire a tool
from someone who's offering the tool,

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they can offer cash instead since they
don't want the food that they have.

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So in this case they do the swap.

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This person's satisfied,
she has acquired her tool and

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this person has acquired money,
which is the value of that tool.

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Then later,

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if this person happens to come across
this person, she still wants medicine,

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this person is offering medicine,
she can swap it for the money, okay?

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Finally, to complete the cycle,
the original person has food.

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This person needs food and has money,
they can pay for the food.

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And the money goes back to the original
person who held the money in the first

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place, and everyone's needs are satisfied.

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Now we can contrast and compare
cash systems versus credit systems.

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In a cash based system one requirement
to bootstrap the system is you need

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an initial allocation of cash.

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The whole trading cycle would not have
worked had the one person not originally

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had some cash on hand.

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By contrast, in a credit based system,
there's no allocation that's needed.

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It can work right out of the box.

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However, the credit based
system does have one drawback.

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And that is the party that gives the tool
to the other party in exchange for

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a debt is taking on some risk.

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There's a chance that that person
never comes back and settles the debt.

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Cash also allows for

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a finer grain precision when you want to
say how much something is worth.

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In barter-base systems, it's hard to say
if a tool is worth more than medicine or

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medicine's worth more than food.

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With cash, we can apply a mathematical
quantity to how much something is worth.

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For these reasons,
this is why we use a blended system today.

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We used a combined system of cash and
credit,

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where debt are measured in the amount of
cash it would take to settle the debt.

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A fairly direct application of this
ideas can be seen in some proposals for

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P2P file-sharing.

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Two systems that use these idea
are Mojo Nation and Karma.

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Mojo Nation was a short lived project.

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It lived about two years, but
it's sort of the intellectual ancestor

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of other protocols that are used
today like BitTorrent and Laughs.

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Karma on the other hand
was an academic proposal.

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In both of these cases,
we consider a P2P file-sharing system.

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Where some people have files,
say movies or music,

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that they're offering to send
to other people in the network.

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And they'll do this in exchange for
other files that they want to acquire.

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In this case, both of these
systems suggested that users,

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when they enroll in the system, are
allocated initially some amount of cash,

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called Mojo or
Karma in the systems respectively.

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Then the users were able to spend this
money to acquire the files that they want,

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so if you're downloading
from someone else.

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Then you're paying cash to that person.

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When someone comes to you and they get a
file that you have, that you're offering,

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they pay the cash back to you.

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And the idea is to try and

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keep your balance floating around the
amount that you were initially allocated.

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This also solves the problem of
arranging barter between users.

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If different users have disjoint sets
of files that they want to share and

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files that they want to acquire,
then by using currency they don't have to

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find that perfect person who
has exactly what they need and

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is looking for
exactly what they're offering.