Zerocoin reduces proof size by 98%, plans to release as altcoin

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:

Matthew D Green on Twitter

Zerocoin

“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.

Dark Wallet

“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:

 

Bitcoin Price Hits $500, a 50x Increase in Just 12 Months

Those bitcoins that made you gasp at $300 just a couple of weeks ago? They were a bargain — the value of 1 BTC has now passed $500.

Prices hit this record and landmark figure at 11.50am GMT on 17 November, and at the time of writing were trading at $503.10 on Mt. Gox.

That means: if you bought a stash of bitcoins at their absolute highest peak price of $266* in April 2013 and then felt nauseous as the price plunged to $65 the same week, you have now almost doubled your investment. Provided you didn’t cut your losses and sell prematurely, that is.

Image

The bitcoin value began rising again almost immediately after that, breaking through the $100 mark again before May and hovering around that region throughout the northern hemisphere summer. It broke through $200 in late October and since then the price charts have been close to vertical, hitting $300 on 6 November and $400 on all exchanges by 15 November.

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There are currently 12,003,175 bitcoins in existence. The total market cap is $5,581,140,286 according to the Bitcoin Price Index, with 1,212,833 bitcoins changing hands in the past 24 hours. An average of 50,535 bitcoins are transacted every hour.

bitcoin price hits $500
The bitcoin price has reached $500 on Mt. Gox. Source: Bitcoincharts

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Why is this happening?

Bitcoin has survived some bumps in that time, most significantly the shutdown of the Silk Road online black marketplace and a number of chilly statements from government representatives. That it has continued to rise despite these setbacks could well be pushing values even higher, as investors sense a more resilient asset than previously thought.

The FBI seized a total of 171,955 BTC from Silk Road in October 2013, an amount so significant there were rumors it could influence bitcoin’s value. It is still unclear what the Bureau intends to do with its haul, if anything.

Nearly every piece of bad news about individual cases heralded more expectations that bitcoin would pay the price.

An asset with more significant value has also meant higher-profile hacks, scams and thefts. Companies like Australia’s Inputs.io found themselves out of their depth as its now considerable deposits came under attack.

What had been worth a few thousand in 2012 was suddenly worth millions, and people with plenty of experience finding naive security holes wanted it.

Rather than face their customers’ wrath, the proprietors of such businesses simply took fright and ran away. As recently as last week, the (supposedly) Hong Kong-based GBL also disappeared, along with its customers’ funds.

Yet the value never fell. Nearly every piece of bad news about individual cases heralded more expectations that bitcoin would pay the price. That it has continued to rise despite these setbacks could well be feeding back and pushing values even higher, as investors sense bitcoin is a more resilient asset than previously thought.

The government has been paying as much attention as the hackers and scammers. The US Senate Committee on Homeland Security and Governmental Affairs (HSGAC) will begin hearings on Monday 18 November with representatives from five wary federal agencies and representatives from the bitcoin advocacy community. Another Senate Committee on Banking, Housing and Urban Affairs will also hold a bitcoin hearing on Tuesday 19 November.

Again, the news of these hearings have had no negative impact on bitcoin’s value.

Silk Road shutdown effect on bitcoin
Silk Road’s shutdown on 2 October 2013 caused only a small dip in the bitcoin price.

Around the globe

BTC China Bitcoin Exchange
ate 2013 also saw an axial shift towards Asia, as BTC China became the highest-volume bitcoin exchange with its own record-setting prices. Reports of media attention and rampant mining activity have made some wonder if China is driving the rise. Even in April, when most gave credit for the bitcoin rise to government bank account confiscations, the factories of Shenzhen were busy cranking out mining hardware and selling it to locals.

The two week shutdown of the US Federal Government in October 2013 over a debt ceiling dispute did little to boost faith in government-backed money, especially the one acting as the world’s reserve currency. Every time the word ‘default’ is even mentioned in this context, no matter what the expected outcome, eyes begin to search for alternative assets.

There have been other alternate theories, including the one that bitcoin value is being driven up by the unfortunate millions desperately acquiring the currency to rid themselves of CryptoLocker malware.

Bubbles

The air in April was thick with the gloating of digital currency cynics and attempts even by technology media to analyze the factors behind bitcoin’s ‘fate’ and look for alternatives. But bitcoin has proved to be more Amazon.com than Pets.com and if it’s a bubble, it is one with a tendency to respawn.

Now, as $1,000 will get you only two bitcoins, the cries of ‘bubble!’ have not gone away.

Garrick Hileman, economics historian at the London School of Economics, said it’s too early to tell whether we’re seeing a bubble in bitcoin. He believes lots of factors are driving the price increase, including pure speculation, increased media coverage and attention from regulators.

“The growing regulatory attention which bitcoin is receiving is likely having a positive effect. This may seem counterintuitive, but to go mainstream, bitcoin needs more regulation, not less.”

Hileman said the US Senate hearings next week will not only bring more publicity to bitcoin, they may also lead to additional regulatory guidance.

“The lack of legal clarity is arguably the single most important issue facing bitcoin right now. For example, banks are scared of bitcoin, and reluctance by banks to work with the growing bitcoin ecosystem is a significant barrier to wider adoption,” he added.

Suggestions of a bubble will probably continue to increase and it’s wise to not get to carried away simply by a rising price. It might be equally prudent to stay ready to pounce on another price drop to $65.

Or we may be laughing at this story a year from now — not because the price has crashed, but because it has soared to even more unimaginable levels. Someone from November 2012 would probably find the idea of $500 quite hilarious too.

* Prices on BTC China were actually over the equivalent of $300 in April 2013, but the exchange trades only in Chinese RMB.