When MT Gox, bitcoin’s biggest exchange at the time, suddenly announced during February 2014 that they had “lost” almost $1 billion worth of bitcoins, some took to the blockchain to see what had happened. Their analysis led, in just a few days, to the second biggest news of that year: MT Gox still held 200,000 bitcoins, then worth $200 million, they appeared to be hiding.
Initially, there was some public debate with Gregory Maxwell, a bitcoin developer, disputing the findings, but all was confirmed when MT Gox publicly stated they had forgotten about $200 million.
The event revealed what is now widely accepted: Bitcoin provides very little privacy. All transactions are public and can be seen by everyone as bitcoin’s public blockchain operates in effect similar to a bank statement which does not show names or addresses, but does show bank account numbers and all transactions from and to that specific bank account.
It can, therefore, be very easy, if ownership of a bitcoin address is known, to see what exactly happened, at what time and between who. To provide an added level of privacy, mixers and tumblers were invented which shuffle transactions between different bitcoin addresses to obfuscate origin and amount. However, Kathryn Haun, Assistant Attorney for the U.S. Department of Justice in San Francisco and lecturer on digital currencies at Stanford Law School, recently stated that tumblers and mixers do not work as “some of the time,” it is possible to “unscramble” transactions.
Monero, a new digital currency that incorporates mixing at the protocol level, tried to improve public blockchain privacy, but like bitcoin, it too shows what address is transacting with who and in what amount. Although it obfuscates such information, complex analysis can, potentially, “unscramble” transactions. Monero, therefore, while providing added privacy in comparison to bitcoin, does not have strong privacy guarantees.
Zcash is a new digital currency created by an impeccable team of developers. Many of them, such as Matthew Green and Zooko Wilcox, are worldwide recognized cryptographic experts, joined by numerous other scientists holding positions at John Hopkins University, MIT and Tel Aviv University.
In the past four years, they have invented a new cryptographic scheme, zero-knowledge Succinct Non-interactive Arguments of Knowledge (zk-SNARKs) or zero knowledge proofs. According to the peer reviewed whitepaper, this allows “users to directly pay each other privately: the corresponding transaction hides the payment’s origin, destination, and transferred amount.”
However, due to a bug in Zcash, private transactions, called z-addr transactions, are currently not possible, but, in theory, a zcash private transaction should look as in the image below:
Rather than a public address, a hash is shown on the left side which is comparable to, say, a reddit nickname being turned into random number and letters, preventing us, therefore, from knowing the pseudonym. The same applies to the right side. That is all we can see. No amount is shown, no public address, therefore there is no way to gain any information whatever from this transaction. An incredibly strong privacy guarantee as it allows no tracking, making Zcash, arguably, more private than paper money.
Does Zcash Really Provide Anonymity?
However, Zcash’s technology is very new and unproven. The cryptography behind Zcash, zk-SNARKs, was invented only a few years ago. It has not yet been battle tested, leaving open the possibility that clever methods to de-anonymize zcash transactions can be discovered, but, the caliber of Zcash developers instills confidence. Many of them have contributed to bitcoin development for years with Zooko Wilcox participating in the now famous thread where Nakamoto announced the Bitcoin whitepaper. As such, if full privacy for digital currency transactions is possible, it seems unlikely there is any better team to make it a reality.
On the security front, there have been a number of audits, but, fundamentally, the entire network has just been born. As such, it is difficult to say Zcash is more secure than bitcoin. Bugs, set-backs and other battle testing events should be expected as Bitcoin itself had a number of them in its early days, including transaction malleability which slightly contributed towards MT Gox’s downfall.
On the other hand, Zcash is built on top of Bitcoin. It is likely, therefore, to have around the same level of security, but unlike bitcoin, the new currency continues the quest for one of the holy grails in the blockchain space: full privacy, promised by Bitcoin, Monero, as well as tumblers and mixers, without much success.
Zcash, perhaps, can deliver where others have failed. If it manages to do so, it uniquely promises full privacy from the public while at the same time allowing regulators, employees, customers, or anyone else, to see transparently any transaction, solving a very serious problem with much market demand.
But, whether it actually succeeds in its aim remains to be seen as the new cryptographic method and the overall network, which has already faced a bug delaying the practical launch of private zec transactions, is audited and pen tested by the brightest minds across the world keen to hack the most valued digital currency which currently trades at more than $1,000 per coin.
Images from Shutterstock and Zcash.