A few months ago an extension to Bitcoin called Zerocoin was proposed.
As you know, Bitcoin is the first digital cash system to see widespread adoption. While it offers the potential for new types of financial interaction, it has significant limitations regarding privacy. Specifically, because the Bitcoin transaction log is completely public, users’ privacy is protected only through the use of pseudonyms. Zerocoin would change that.
Yesterday, Matthew Green from Zerocoin project posted this tweet:
“We designed a new version of Zerocoin that reduces proof sizes by 98% and allows for direct anonymous payments that hide payment amount.”
“We’re going to release it as an alt-coin. It will take a few months to get it to that point. Bitcoin can do what it wants.”
“We need a few months to clean up the code. We plan to release the client and an alt-chain.”
“Hide payment amount from anyone but the Payer/Payee is the goal. It’s not anyone else’s business.”
In August, I wrote Cyrpo-Keys are Free Speech and in that article touched on Zerocoin when I wrote:
Bitcoin may seek favor with government regulators and opt for more transparency, but then some other crypto-currency could implement the Zerocoin protocol. We might see LiteCoin or FeatherCoin go full-throttle in the direction of total anonymity, and if that happens the debate (about privacy) will be over. It seems inevitable that at some point one these emerging forks in the Bitcoin road will become an anarchist’s wet dream
For those who are uninitiated, Zerocoin is not intended as a replacement for Bitcoin. It’s actually a separate anonymous currency that’s designed to live side-by-side with Bitcoin on the same block chain. Zerocoins are fully exchangeable on a one-to-one basis with bitcoins, which means you could use them with existing merchants.
Look Out #1, Here Comes ZERO
In the beginning… the idea was to add the Zerocoin protocol to the blockchain making it possible to redeem Bitcoins anonymously. Just as paper currency once gained its value from being redeemable for gold, Zerocoins wold gain their value from being redeemable for Bitcoins. It now seems this model may be changing and Zerocoin may soon coin itself.
The problem was that the proofs needed for Zerocoin took a lot of processing power. In addition to the computation cost being high is also seemed Zerocoin required too much storage space to be practical. With the announcement this week that there has been a 98% reduction in proof size, that means Zerocoin is now lightweight enough to be implemented into Bitcoin (or any other cryptocurrency).
The big news is that Zerocoin is now talking about moving forward as it’s own alt-coin, perhaps as early as a few months from now. This is a radical chagne from the “road ahead” published on the Zerocoin website, it still reads, “Get someone [to] integrate it into bitcoin/litecoin/*coin.”
Yesterday, Matthew Green said, “Bitcoin can do what it wants.”
This makes perfect sense because this isn’t a simple change in the Bitcoin protocol. It’s a huge, all-encompassing change, which definitely deserves its own crypto-currency. Having said that, some serous thought need to be given to this new direction.
The Heat Is On The Street
In the past those individual who were behind eGold and Liberty Reserve were both “done in” by government money laundering laws. In the case of the Liberty Dollar the crime was imitating the USD and in the Post-9/11 World this is also called a form of “domestic terrorism” (whatever that means). The point is Matthew Green needs to lawyer up.
Ross Ulbricht, even if the charges of hiring killers and laundering funds that were held in escrow were dropped, he also allegedly ran a site that facilitated anonymous communication between dealers and users, and he is absolutely in deep water from that, because he knew that that is what was going to happen on the site he created. All he did was create the site, and as a result of everyone using it, he will be charged for helping enable those crimes. The owners of Liberty Reserve were in spain at the time they were arrested too so the US definitely has long arms. Liberty Reserve was also used for many legitimate uses, as what happens with all money, but Zerocoin is very specifically tailored to strip identity from it’s transactions and Bitcoin can and will be able to ensure a high level of privacy, but it doesn’t have the total anonymity that criminals desire, so that means that Zerocoin’s main useful feature is going to be to facilitate illegal activity.
Now Bitcoin also enables crime, but the creator is nowhere to be found, the bell can’t be unrung, the Bitcoin genie is out of the bottle and there’s no-one to blame, and so all that is left is to arrest those that do use it for crime. Satoshi is long gone, unharassable, unarrestable. Matthew Green however, knowing fully well his alt-coin would be used to instigate all manner of illegal activity is actively creating an untracable currency, not a feature of Bitcoin, but his own currency, which means he will be the creator, issuer of coins and the facillitator when this thing goes live.
If this were just math, simply a protocol integrated into Bitcoin (or MegaCoin) then it would be the tens of thousands of miners that would essentially be the issuers, facilitators and creators of this anonymised coin. However, if Zerocoin becomes it own alt-coin then the creator is likely to experience some real serous government heat.
CoinValidation vs Zerocoin
Meanwhile, CoinValidation efforts are gaining steam. Basically, the idea is to build a centralized service that ‘redlists’ (blacklists) every Bitcoin addresses not authorized by this system. In effect, keeping good coins out of the hands of bad people or tagging other coins for having ties to criminals, hackers, and drug dealers. Proponent of such a system will help “keep the bitcoin economy from being a hotbed of crime.”
This CoinValidation and blacklisting taint, are both completely against what Bitcoin was designed to be and the ideals it was founded upon. The more I read about it the worse it sounds. Some have started to call this CoInvalidation based on this Reddit post. This misguided movement to “taint” Bitcoins with even less privacy features isn’t likely to fade away. Some people argue that even the limited anonymity of Bitcoin is too much, calling this its only flaw. The debate is getting quite heated.
How It Works
Here is quote from zerocoin.org
The Bitcoin payment network offers a highly decentralized mechanism for creating and transferring electronic cash around the world. Unfortunately, Bitcoin suffers from a major limitation: since transactions are stored in a public ledger (called the “block chain”) it may be possible to trace the history of any given payment — even years after the fact.
So here is the problem, since the Bitcoin ledger is public, any party can recover this information and data mine to identify users and patterns in the transactions. In other words: Bitcoin transactions are conducted in public. The most common solution to this problem is to use Bitcoin laundries – services that mix together many users’ bitcoins in order to obfuscate the transaction history. Laundries suffer from a number of potential drawbacks, however, as they must be trusted to return coins. Moreover a compromised or malicious laundry offers no anonymity.
Zerocoin achieves this by creating a separate anonymous currency that operates side-by-side with traditional Bitcoin on the block chain. Zerocoins can be thought of literally as coins. They’re issued in a fixed denomination (for example, 1 BTC), and any user can purchase a zerocoin in exchange for the correct quantity of bitcoin. This purchase is done by placing a special new “Zerocoin Mint” transaction into the block chain.
Here is a link to Matthew Green giving a talk about this. As he explains, this system uses standard cryptographic assumptions and does not introduce new trusted parties or otherwise change the security model of Bitcoin. Matthew details Zerocoin’s cryptographic construction, how he envisioned it would be integrated into Bitcoin, and he examines its performance both in terms of computation cost and impact on the Bitcoin protocol.
“We believe Bitcoin is fundamentally subversive” said Cody Wilson, “We here to force the conflict.”
In a recent episode of the Keiser Report, Max Keiser interviews Cody Wilson about living in a trifecta of disruptive technologies as a citizen of the future in which bitcoin means a thousand silk roads and fanfare for the common man. If you want to understand the impact the Zerocoin is going to have on the world, watch this interview: