Cash and credit are both fundamental ideas, to the point that we can sort the multitude of payment methods into just two piles. The first one is a cash pile, namely Bitcoin. However, let’s consider the credit card pile. Credit cards are among the dominant payment methods used on the web. One just has to think of Amazon to know what we mean about acquiring something you like online. All that is required is to key in your credit card details, send it to Amazon’s servers, and they take it from there by talking to a variety of financial systems such as banks, processors, credit card companies, and other intermediaries.
Cryptocurrency exchanges operate differently, which is something we will get to a little later. With intermediaries like PayPal one do not have to worry about providing the seller with your card details not give them your identity. The downside to this is that both you and the seller need to have an account with the intermediary.
Then there were SET during the 1990s, With this setup, the customer didn’t have to send through their credit card details or even enroll with the intermediary. Once you are ready to make payment, the browser would merely pass the relevant transaction details via your PC to a trusted shopping app. The application would then encrypt the data provided with the card details in such a manner that only the intermediary could decrypt it. What went wrong down the line that caused SET to fail?
The fundamental issue was that they lacked certificates, which is a way to securely associate a public key such as a cryptographic identity that is also a real-life identity. This is something the website would manage to obtain from firms such as Verisign. They are known as “certification authorities” It is a case of putting security before usability. This involved all users in getting a certificate, which was not widely accepted. As you can imagine it is about as unpleasant as doing your taxes.
This brings us to the next stage where we go from credit to crypto. The thing is that you have to bootstrap cash. The advantage of doing this is that it prevents a buyer from defaulting on their debt. What is more, that you are opened up to two added advantages from making use of Bitcoin.
The first would be anonymity. As your card is issued in your name, with a credit card, the bank would track all your spending. Once you pay using crypto (cash), the bank has no claim on your details or the other party once they get to redeem it. What it also means is that the user can keep better track of all the monies they spend.
This is where Chaum’s innovation in the form of cryptography came into the equation in that he managed to figure out how to prevent double spending while keeping the system anonymous.
The way it worked was like this:
- Once a new note was issued to you, you’d have the privilege of picking a serial number, which you could write down on a piece of paper, then cover it so no one may see it. The person who issued the note would sign it without seeing the serial number. They term it as a “blind signature” or cryptography.
- This was part of the first digital severe cash proposal. It may work well, but still needs a server that is run by the central authorities, such as the banks. Everyone involved had to trust that entity. The problem is when the server goes down temporarily, the payments would grind to a halt.
- Another problem that got solved was double spending in that instead of trying to prevent it from happening, they would focus on detecting it once the servers were up and running again. What comes to mind is when airplanes are flying, and a credit card gets used without a verification process. The transactions would be processed later on once they are able to reconnect to the given network. Should the card be denied, then the person who did it would either owe the bank or the airline.
In the same way, Fiat, Naor, and Chaum developed a system that detected double spending after the fact. You can call it an intricate cryptographic dance. Welcome to the world of cryptocurrency ingenuity.