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:
(…) An incredibly strong privacy guarantee as it allows no tracking, making Zcash, arguably, more private than paper money…
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