Where Hope Lies for Privacy, Anonymity, and Fungibility in Cryptocurrency

Published on November 15th, 2016


Komodo: Using Bitcoin to protect your privacy

We have to set this straight from the get-go. Komodo is not part of Zcash (ZEC).

Our project is a fork of Zcash. We’ve built Delayed Proof-of-Work (dPoW) consensus on top of the open-source Zcash project to secure third-party chains through notarizing data on the Bitcoin blockchain.

In this post, however, we are going to focus on Zcash. In order for you to understand how Komodo stands to change the cryptocurrency landscape, we first have to introduce you to its parent coin.

Introducing Zcash

On January 20, 2016, Zooko Wilcox, an early cypherpunk, published a blog post that marked the beginning of a new cryptocurrency era. “I’m extremely happy to announce the Zcash project,” he wrote. “This is a project to create a new currency for the Internet, inspired by Bitcoin.”

Wilcox is a renowned cryptographer and developer. A past project of his includes DigiCash, one of the first steps of innovation that led to Bitcoin. In fact, Satoshi Nakamoto, the inventor of bitcoin, cited him in one of his writings.

The protocol on which Zcash runs, however, has its roots in the Zerocash white paper that  E. Ben-Sasson, a computer science professor at the Israel Institute of Technology, published in 2014. In it, he explained how to use zero-knowledge proofs to prevent transaction graph analyses.

In essence, Ben-Sasson showed it was possible to send money online without disclosing receiver and sender information, while at the same time allowing for verification of the transaction’s authenticity. Zero-knowledge proofs are also known as zk-SNARKs, which stands for zero-knowledge Succinct Non-interactive ARguments of Knowledge.

Since its launch, Zcash has raised $1 million in seed funding. Its investors include Pantera Capital, Digital Currency Group, and Fenbushi Capital. The company has also put together a team of seventeen experts to design its coin. These include Professor Ben-Sasson, Alessandro Chiesa, a faculty member in computer science at UC Berkeley, and Christina Garman, a cryptography and computer science PhD student at Johns Hopkins University.

The Problem Zcash Solves

Zcash seeks to fix privacy, anonymity, and fungibility of cryptocurrency online. Wilcox said:

We believe that personal privacy is necessary for core human values like dignity, intimacy, and morality.

Privacy, anonymity, and fungibility are critical, especially with personal data becoming the new gold, which both businesses and governments are mining and storing in data centers. Few places yield personal information more than where you spend your money. The catchphrase “follow the money” from the 1976 drama-documentary All The President’s Men encapsulates this idea.

Marketers use your financial data to bombard you with ads, while government agencies use it to monitor whether you are engaging in activities they deem illegal, or evading paying your taxes. Even more, storage of personal data in servers connected to the Internet is always a security risk.

For instance, if you stop at an adult store and make a purchase using your credit card, you leave behind a digital trail. A hack on the merchant’s server or that of your payment processor may lead to your public embarrassment, could jeopardize your career, or even threaten your relationships.

With the adoption of digital money, it has become even easier for businesses, governments, and individuals to scrutinize and track how you spend your money both online and offline.

Privacy is the exact reason Satoshi Nakamoto invented Bitcoin. The cryptocurrency was supposed to bring security, fungibility, and anonymity back to currencies, especially when used in the Internet environment. You should be able to expect to shop at an adult store, for instance, without worrying that someone might link your identity to the coins you spent, or to a particular transaction.

Bitcoin, however, has turned out to be neither private, anonymous, nor fungible. Since all transactions exist on an open public ledger, it is possible to determine the sources and destinations of the operations by using services such as Bitcoin transaction graph or taint analyses.

With this ability to identify the source of coins, some merchants, particularly those under pressure from anti-money laundering (AML) laws, are declining to accept some coins. This is regardless of the fact that the current holder of the coins might have nothing to do with their tainted past.

Undermining Fungibility

At the third Bitcoin scaling conference—which took place on October 9 and 10, 2016, in Milan, Italy—the central themes were the fungibility and privacy of cryptocurrencies. Adam Back, a cryptographer and co-founder of Blockstream, a startup that builds blockchain solutions, expressed his alarm at the attack of these qualities in bitcoin and other cryptocurrencies. He said:

If people multiple hops removed from you are associated with some trade on Silk Road or something like that, it turns out that some of the exchanges and wallets, using taint tracing services, will freeze your account and ask you take your funds elsewhere.

Solutions to this problem, most of which were explained at the Milan conference, include mixers, CoinJoin, Lightning networks, TumbleBit, ring signatures, and Mimblewimble. However, some are works in progress and others haven’t been proven to be efficient.

For example, mixers are the most often used of these solutions. Because they are centralized, however, they bring a host of challenges. From the Zerocash white paper:

Mixers suffer from three limitations: the delay to reclaim coins must be large to allow enough coins to be mixed in, the mix operator can trace coins, and the mix operator may steal coins.

Zcash is a cryptocurrency that contains an inbuilt guarantee of privacy, anonymity, and fungibility. Apart from making it friendlier to use, it is also less costly, especially to users who care very much about their privacy.

Bitcoin, Zcash, Komodo

On October 28, 2016, Zcash went live and people started mining and transacting on its blockchain. While the mining reward will halve every four years, as with Bitcoin, 20% will go to the founders in the first four years. Like bitcoin, Zcash (ZEC) has a cap of 21 million coins. This differs from the design of Komodo, which has an initial coin offer (ICO) of 90 million coins.

In our next post, we explore both the technical, structural, and governance difference between Zcash and Komodo.

This post is also available in: Chinese (Simplified), Russian, Spanish

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