Testnet version history From Bitcoin Wiki: Testnet


  There have been three generations of testnet. Testnet2 was just the first testnet reset with a different genesis block, because people were starting to trade testnet coins for real money. Testnet3 is the current test network. It was introduced with the 0.7 release, introduced a third genesis block, a new rule to avoid the "difficulty was too high, is now too low, and transactions take too long to verify" problem, and contains blocks with edge-case transactions designed to test implementation compatibility.


I'm interested to know about Testnet(1) and Testnet2: the differences, the reason each version was deprecated (in particular, how/why people were selling TBTCs). I'm interested in the "historical context" as much as I am technical reasons for changing to a new Testnet version.
The testnet networks are very similar to each other. I listed all of the testnet resets here, and it seems like they make the minimum changes necessary to create a new blockchain.

It seems like the testnet3 reset came about because of compatibility issues:


  "Mark III" because this is the third genesis block for the testnet. The
  main reason for the reset is to get a more 'sane' test network; with the
  BIP16 and BIP30 and testnet difficulty blockchain rule changes the old
  testnet is a mess, with old clients serving up different, incompatible
  chains.


(Source.)

The creation of testnet2 predates the Bitcoin mailing list, but given this discussion in #bitcoin-dev, I think it happened because difficulty on testnet was too high:

17:04   slush   btw any chance to reset testnet?
17:05   tcatm   you could use your pool and a modified bitcoind to reset it in about 6 hours
17:05   slush   no, I don't want to connect pool to testnet ;)
17:06   slush   But new genesis block in next release should solve this, right?
17:07   gavinandresen   You talking about possible testnet reset?
17:08   slush   it would be nice. It's practically impossible to 'test' anything on testnet :)
17:08   gavinandresen   If you have two machines you can create your own private testnet
17:09   gavinandresen   ... but you can't test until they've generated at least 100 blocks.
17:10   slush   gavinandresen: agree, but is there any reason for keeping difficulty so high?
17:10   gavinandresen   Nope
[Edited for length.]


(Source.)