Privacycoins: HTTPS for blockchain money?
Image by Guido van Nispen via flickr.com. License: Creative Commons
An important CEO predicts that 2020 a cryptocurrency that will be more private than Bitcoin offers. The comparison circulates that Bitcoin is like the unencrypted HTTP, while the so-called privacy coins correspond to the HTTPS that has now become the standard. Among the privacy coins advertised in this way, Monero stands out above all, which Europol now also shows respect for – which, however, could backfire for users.
Sometimes it is difficult to see what distinguishes a loser from a winner. So Balaji S. Srinivasan a few years ago with his company 21. Co managed by investors 116 million dollars without ever becoming a serious product. 21. co tried to bring Bitcoin micropayments into devices, sold an overpriced Raspberry for that original plans to have the devices mined were rejected, but experimented with payment channels and renamed Earn.com in the end, which was then swallowed by Coinbase and, as far as I know, has now been shut down.
Despite this obvious underperformance, Balaji continues to enjoy an excellent reputation in the crypto scene. A few days ago he presented his new project: Nakamoto.com. This is a moderately edited blog where industry captains of the crypto world publish essays. In addition to Balaji himself, Coinbase CEO Brian Armstrong writes there. In his predictions of what 2020 will happen, we find an interesting comment on privacycoins:
“I think we will see that one of the dominant chains in the year 2020 will integrate more privacy. Just as we started the Internet as HTTP and only later introduced HTTPS as the standard on many websites, I think that we will eventually see a 'privacy coin' or a blockchain with privacy features 2020 arrives in the mainstream. In most cases it makes no sense to publish every payment on a transparent account book. ”
That fits quite well with what another prominent representative of the scene tweeted at the beginning of the year. John McAffee, security guru, crypto-ideologist and ICO advertising space, announced some time ago that he would eat his best part if Bitcoin should not be in the year 2020 100. 000 worth dollars (or something). Now he comments: “Eat my cock in 12 months? That was just a list to get new users on board. It's worked out. Bitcoin was there first. It is an ancient technology. Everyone knows that. New blockchains have privacy, smart contracts, distributed apps and more. Bitcoin is the future? Was the Model T the future of automobiles?
Bitcoin, Armstrong and McAffee seem to agree, is an old technology. The future belongs to blockchains with more features, and one of them is to offer more privacy. This suddenly makes the so-called “Privacy Coins” extremely interesting. Three of these are particularly prominent: Monero, Zcash and Dash.
Dash is somewhat excluded because its privacy model is based only on the fact that users can optionally operate a type of CoinJoin via masternodes. While this is more private than simple transactions, it can probably be cracked by good analytical tools.
Zcash, on the other hand, is the favorite privacy coin of some industrial bosses, which is why Zooko, the founder and lead developer of Zcash, can also publish on nakamoto.com.
There he blatantly hyped Zcash, using the same argument Brian Armstrong uses: “The books you bought, the places you were, the people who were with you – all that can be reconstructed from a list of calculations. And yet public blockchains like Bitcoin and Ethereum store this information about you for anyone who looks at it. ”Zooko compares this to the Internet, where in the past, every connection was sent unencrypted before it was encrypted by HTTPS. “We developed a similar solution for encrypted transactions on a public blockchain, namely Zcash.”
Then Zooko falls into the hysteria about blockchain transparency that has now become common: “Anyone who knows your address can see how high your balance is, who you transfer something to, the amount, the date […] , Just like before HTTPS, everyone can read everything. ”Therefore, Zooko repeats, Zcash is the analogy to HTTPS.
The analogy, of course, limps tremendously. While every Internet user has only one IP address, Bitcoin users have any number of addresses on any number of wallets; and while http specifically shows which websites a user is browsing, a Bitcoin transaction only reveals a pseudonymous destination address that is usually generated anew for each payment and used only once. It is not even easy to find out how much the sent amount is because one of the outputs contains the change that goes back to the transmitter. The situation is nowhere near as dramatic as people like to describe it, who usually want to sell you a privacy altcoin.
Still, Brian Armstrong and John McAffee predict that 2020 could be the year of the privacy coins. For Zcash, however, it does not look so rosy. First of all, because the “Shielded Transaction” are optional. They are also quite expensive, computationally complex and, at 2 kilobytes, too large to scale well (which further makes the comparison with HTTPS questionable). In addition, Zcash is quite a flop, if you can say that after a good two years of existence: the transaction volume is stagnating, the market capitalization is at 270 Million dollars in place 32 in the ranking, and thus pretty close to the Shitcoin threshold; the price is currently scratching around 30 dollars at the all-time low, which makes Zcash the only one among the three privacy coins consistently bad investment.
Of course, this does not apply to the founder Zooko. He earned more than $ 4 million (in ZEC) a year through the founder reward at Zcash – a mechanism that pays part of the mining proceeds to developers and founders. A lot more went to his company Electronic Cash Company. Founder Reward Mitte 2018 should actually expire, but Zooko has stated that this should not be the case, which is why he is obviously going to continue. The redistribution of money from investors to the founders of a coin has never been so clear as with Zcash.
The only privacy coin I think is serious is Monero. There are no founder rewards and no pre-mining here, but a community that is clearly behind two goals – a high level of privacy and resistance to Asics – and that is technologically very competent and committed. And where the number of users of Zcash tends to zero, Monero is becoming increasingly popular in the Darknet and enjoys a grass-roots movement by idealists. Monero's price is also at a relatively low level, but at least significantly higher than the beginning 2017; Early adopters who 2016 or earlier got into Monero enjoy magnificent profits, also against Bitcoin.
Europol recently paid tribute to this. According to several media reports, Jerek Jakubcek from Europol also talked about Monero in a webinar that was available via video, but is no longer available. He reported an investigation in which officials followed the trail of money until it fizzled at Monero. “Because the suspect used a combination of Tor and Monero, we were unable to pursue the funds further. We were unable to determine the IP address. That means we have reached a dead end. Whatever happens on the Bitcoin blockchain is public, and so we got pretty far. But the Monero blockchain was where the investigation ended. This is a classic example in some cases where a suspect decided to switch his or her balance from Bitcoin or Ethereum to Monero. ”
Unfortunately the video no longer exists. In addition to the traditional quote, it probably contained many interesting comments about Monero, the market for privacy coins and the status of blockchain analysis on other coins. If someone has more information here, I would be happy to receive a comment.
Monero has now established itself as the gold standard for anonymous blockchain transactions. If a coin claims to become the https of cryptocurrencies, it is this. However, Europol's knighthood could also have a bitter revenge. Because if Europol and other law enforcement officers acknowledge that Monero transactions are not retrospectively traceable if they are used by a criminal, this may mean that regulators and law enforcement officers will ensure in the future that the persecution – i.e. the intrusion into privacy – done in advance. So not only when there is a suspicion, but preventive and generalized, for all users. It could no longer be the result of an investigation, but the pure possession of Monero.
We already see this tendency when a stock exchange like BitOasis from Dubai requires users who have held privacy coins to provide very detailed information so that the coins can be released. Other exchanges have removed Monero from trading because it is difficult and expensive to align the privacy coin with the existing regulation, and yet other exchanges have not taken Monero at all. The exchanges, which are still relatively unbiased in this regard, often impose significantly lower payment thresholds for Monero than for Bitcoin.
In other words: The regulation will make the purchase and use of Monero (and other privacy coins) difficult and unattractive for users who do not necessarily need privacy. And once this separation is there, as soon as the “innocent citizens” use a transparent coin like Bitcoin or Ethereum, and the criminals use a coin like Monero, law enforcement should have achieved an important goal.
Brian Armstrong, CEO of a stock exchange like Coinbase, which is known to freeze users' balances when they contact twilight platforms through transactions – be it a darknet market or a gambling site – should actually know this. Who, if not him, should be aware of how law enforcement officers deal with the privacy coins? It is a little surprising that he is oracleing 2020 a privacy coin as the HTTPS of cryptocurrencies. Does he know something we missed? Is he aware that regulation does not have the legal basis to excessively strangle coins like Monero through conditions?
Or does Armstrong know because he knows the hard regulation of cryptocurrencies, with their requirements, which force exchanges like Coinbase to spy on their own users – does he know just how important a private cryptocurrency is? And does he strive for them because they take the exchanges out of their duty to analyze customer transactions? We have a topic here that we will certainly learn a lot about later this year.
Last but not least, we should say a few words about Bitcoin. Because the gloomy – or better said: light – the king does not look at cryptocurrencies, as John McAffee, Zooko and partly Brian Armstrong suggest. Basically, the privacy model of Bitcoin, as detailed here, is not as bad as often described, but a very balanced mix of privacy and transparency.
With several well-tested wallets with CoinJoin and other mixing methods – such as Wassabi and Samourai – Bitcoin users can also relatively easily achieve privacy that makes transaction tracking, if not impossible, very difficult. Difficult enough to provide the necessary privacy for blameless people who are not hunted by police experts in months of investigations. And who then combines this with Lightning to pay or get paid should hardly have any use for privacy coins.
Ethereum is also better off about privacy than is sometimes said. Thanks to the zkSnarks acquired from Zcash, the smart contracts blockchain now has a decentralized mixer with Tornado Cash. So there is much to suggest that a privacy coin does not become a dominant chain, but that a dominant chain element of a privacy coin is preserved.