The Zerocoin protocol counters the ability of the Bitcoin blockchain to remember every transaction that has ever occurred. It enables direct anonymous payments by providing an extension of Bitcoin that makes tracing transactions on its blockchain almost impossible. In essence, it’s fixing Bitcoin’s privacy issue, which is currently placing people’s financial privacy and even safety at risk.
What causes Bitcoin’s privacy issues?
The Bitcoin blockchain (a public ledger) stores and records all transactions. This makes any payment carried out by Bitcoin traceable even long after the transaction has taken place. As all transactions occur in public, no payment network can guarantee truly private payments using Bitcoin.
The protocol uses pairs of public and private keys to secure transactions and provide a sort of ‘pseudonymity’, but Bitcoin transactions can still be tracked. Even if you generate multiple public keys to protect your identity on the blockchain, algorithms can connect them to a single person based on buying habits. This eventually identifies related payments and connects a purchase with a physical address or identity.
How the Zerocoin protocol works
The Zerocoin protocol uses zero-knowledge proofs, which means that no data from your past transactions is linked to the coins. The only two people who ever know about the trade are the sender and receiver.
Privacy is almost impossible to achieve in the absence of this protocol. All transactions occur on the public blockchain, and all users have access to the data.
Users who want to keep their transactions anonymous can convert their non-anonymous Bitcoin into Zerocoin. This operation is called “minting”, which means burning out one or more digital coins together with all their history. This includes transactions and previous owners.
After you mint a coin, you receive mathematical proof of that coin, but without any details that specify which currency you’ve burnt out. This means you have a new, history-free coin that you can use to make purchases.
It’s the same cryptocurrency. Its value doesn’t change and any transaction you make with the Zerocoin occurs on the same blockchain. But the new coin has the additional characteristic that allows it to remain hidden through this series of mathematical tricks.
So, if you mint “100” coins, you automatically get 100 Zerocoins that have no history attached to them. A Zerocoin is unique, can’t be duplicated or forged, and, at the same time, no one can identify it once you’ve changed your Bitcoin into Zerocoin.
So, when you use a Zerocoin to make a purchase, no one can lead it back to you, your wallet, or your personal data. Sounds pretty good, right?
How is Zerocoin different from Bitcoin laundries?
The Zerocoin protocol was introduced in 2016 by a group of cryptographers at John Hopkins University lead by professor Matthew D. Green. Together with two of his graduate students, Ian Miers and Christina Garman, the computer science professor needed almost three years to come up with a solution that could solve the privacy issue of Bitcoin adopters.
Before the Zcoin, the network had tried other approaches to achieve anonymity, with higher risks and less efficiency.
Bitcoin owners could use so-called laundries to get rid of a coin’s history. This type of service mixes digital currencies from more users to confuse transaction histories. However, this practice can only slow down an attempt of tracking past transactions, especially when the number of users who need to “wash” their coins is small.
Zerocoin, on the other hand, ensures a higher level of anonymity, guaranteed by complex mathematical models used to remove a coin’s history. According to Zcoin developers, this increased security can be maintained even if part of the network is compromised.
Another advantage of using the Zerocoin protocol instead of Bitcoin laundry services is that you don’t need a third party to wipe out a coin’s history. Since the protocol is just an extension of Bitcoin, it operates on the same blockchain. So, there are fewer trust issues involved.
As a user, you don’t have to give someone else your coins to be “washed” and hope they’ll give them back to you. You get to mint your Bitcoin and receive the mathematical proof of it automatically.
Still an imperfect protocol
With all the benefits of the Zerocoin protocol and enthusiasm generated by the new Zcoin, there’s still no such thing as completely anonymous transactions or perfect protocols.
The Zerocoin protocol requires users to mint their coins in fixed denominations of 1, 5, 10, 25, and 100 to protect privacy. Moreover, anonymising coins consumes a lot of energy and space on the blockchain.
However, as imperfect as it is, Zerocoin does provide the solid foundation that developers need to implement a protocol to fix Bitcoin’s privacy issues. One that guarantees privacy and anonymity on the blockchain without putting people’s security and finances at risk.