Bitcoin and the Myth of Anonymity

Aside from the vast herd of speculators flocking to Bitcoin, many of whom aim to profit from an asset that most probably do not fully understand, the majority of informed Bitcoin users and investors see in the digital currency a genuine “free-market” means of exchange; one that operates beyond the confines of a regulated market; one that is not subject to the machinations and manipulations of a centralized authority; and one that virtually guarantees an impenetrable cloak of anonymity and privacy.

The critical point here is “anonymity.” It’s the weak point; the chink in the armor.  Lifting the veil of anonymity would not only compromise a cryptocurrency owner’s privacy, it would also make the entire network vulnerable to the kind of regulative intrusions/manipulations that cryptocurrencies were initially designed to escape, exclude, or subvert.

As Eric Hughes wrote in his 1993 Cyberpunk Manifesto, Privacy is necessary for an open society in the electronic age. Privacy is not secrecy. A private matter is something one doesn’t want the whole world to know, but a secret matter is something one doesn’t want anybody to know. Privacy is the power to selectively reveal oneself to the world.” (emphases mine)

Unfortunately, Bitcoin users may eventually come to realize that their cloak is a lot thinner than they were led to believe. Bitcoin is not anonymous, but rather, pseudonymous. And the two terms cannot be used interchangeably. A Bitcoin user’s identity and personal information is replaced with a series of numbers and letters—a digital wallet address (a pseudonym). This is the reason why its creator, Satoshi Nakamoto, stressed the importance of using multiple addresses to enhance one’s privacy.

But even this tactic—distributing pseudonymous currencies across multiple wallet addresses—will not be able to withstand a thorough blockchain analysis.

It is toward this problem—transforming a pseudonymous currency into a completely anonymous and impenetrably private asset—that ZCash offers a series of solutions.

Enter ZCash

ZCash is a cryptocurrency that grew out of the Zerocoin project, a cryptocurrency protocol aimed at enhancing anonymity for Bitcoin users.

ZCash bears a few key similarities to Bitcoin:

  • It has a 21 million coin cap.
  • It has a 4-year halving time.
  • Blocks are mined faster and rewards are smaller, but their issuance rate is cumulatively equivalent to that of Bitcoin.

One of ZCash’s key innovations is the introduction of “zero-knowledge proof” protocols called zk-SNARKS (“zero-knowledge succinct non-interactive arguments of knowledge”). This is how ZCash is able to deliver transactions that are virtually 100% anonymous and untraceable.

As stated on the ZCash website:

“Zero knowledge proofs are a scientific breakthrough in the field of cryptography: they allow you to prove knowledge of some facts about hidden information without revealing that information. The property of allowing both verifiability and privacy of data makes for a strong use case in all kinds of transactions, and we’re integrating this concept into a block chain for encrypting the sender address, the recipient address, and the amount.”

Here’s a simpler example:

Let’s assume you are color blind. I have one red and one green ball. They look the same to you (as you are color blind). You want me to prove that they are in fact different (as you cannot tell the difference).

Here’s how the zero-knowledge proof system works: You place the balls behind your back and reveal one ball at a time. You will occasionally switch the balls. Each time you reveal a ball, you ask me if you switched the balls. If the balls are the same color, then I wouldn’t be able to tell when you made a switch (as they are the same color). But if they are different colors—one read and one green—I’ll be able to tell you each time you switched the balls.

Upon correctly answering your questions several times, I will have proven to you that the two balls are indeed two separate colors; and you will never learn which ball is red and which is green.

So how does ZCash use zero-knowledge proof to make cryptocurrency transactions completely anonymous and untraceable?

ZCash users have the option of making their coins transparent or private. If a user opts for privacy (I must give credit to for their description which I am summarizing below):

  • Coins are carried by notes specifying an amount and a destination address.
  • The destination address will have two public keys: a “paying” key and a “transmission” key.
  • The transmission key “encrypts” the payment using a “key-private asymmetric encryption scheme” making it accessible only to the “private” key that corresponds to the “transmission” key (now called the “viewing” key).
  • Now that the encryption is private, neither the transaction amount nor the transmission key owner is transparent to the public.
  • The owner can now use the viewing key to decrypt the note and view who had sent him the coins.
  • Each note is associated with both a note commitment and a nullifier (both of which are publicly known).
  • The nullifier is what ensures that coins are not double-spent.
  • To correlate the commitment with the nullifier, you must know the transaction to which they refer; and to compute the nullifier, you need the destination’s spending key.

In the end, the validators prevent the double-spending of coins, and the spender must only prove that a commitment has been revealed without specifying the commitment. In short, the amount of spent coins cannot be linked to any specific transaction.

Yes, that was complicated.

In conclusion, what makes ZCash a cryptocurrency to watch is that its protocols, through originally proposed for the Bitcoin network, can be integrated for use into virtually any cryptocurrency. Beyond its value as a “coin,” its technological applications potentially reach far beyond its own state as a digital currency.

At the time of this writing,  ZCash’s market cap stands at $801,705,144, it’s price is at $304.32, and its circulating supply is currently at 2,634,406.

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