The recent rise of Bitcoin and its subsequent crackdown have taught us one thing: Bitcoin is awesome, but it’s not fully private. In fact, it’s one of the most public transaction systems ever, operating through an open access database known as the blockchain, and each transaction has a traceable IP address. In Bitcoin, you may be unknown, but your money isn’t.
Zerocoin, the "anonymous distributed e-cash from Bitcoin," is a code designed based off of Bitcoin and offers to patch that kink in the popular cryptocurrency’s façade of anonymity. The code, written by a team of cryptographers at John Hopkins University, acts as the ultimate laundry but is actually a built-in mini currency. So Bitcoin goes in, some internet magic zerocoin-crypto-transactions happen, and untraced Bitcoin comes out.
To all drug dealers and alleged contract killers from Silk Road, on behalf of America: You’re welcome.
Jokes aside, Zerocoin is relevant for all aspects of Bitcoin. See, the blockchain forgets nothing, and all transactions made are publicly displayed by their respective digital addresses. Sure, you can get multiple digital addresses and even hire laundry companies (whose laundry methods and effectiveness are questionable), but Bitcoin itself is not inherently private.
Now that the government’s lens is focused on Bitcoin, Zerocoin is the hero this currency needs. Certainly it will aid the online shenanigans of numerous miscreants and seedy members of the internet (forget “contract killers;” think guys like Anonymous or, you know, the largest Bitcoin Ponzi schemer), but Bitcoin needs to add legitimacy to its privacy, and operating with a built-in add-on feature such as Zerocoin will fulfill that need.
Matthew Green, The John Hopkins professor who leads the Zerocoin team said it best. “Everyone’s going to look at this as trying to facilitate the trade of weapons or drugs, but privacy is important. And people have a right to it.” Green elaborated on the nature of privacy. “[I]f I buy something at the drug store, that used to be between me and possibly my credit card company. With Bitcoin, it’s between me and the whole world.”
The IEEE Security and Privacy conference back in May featured a presentation from Zerocoin to spark some awareness and shed some light into Bitcoin’s privacy flaws. This is good news, but Zerocoin will need more momentum, especially at a time in which Bitcoin’s headlines are getting more and more flooded with government agency names. Another challenge for Zerocoin will be putting its code into every Bitcoin user’s system, which will take a conscious effort to obtain the trust of a user base that has many reasons to be distrusting.
It's difficult to imagine a currency with a more thorough method of privacy guarantee for its users. Not everyone on the internet is a hacker-for-hire or a get-rich-quick rat. Some just have a grudge with government surveillance, or perhaps want to partake in the victimless crime of responsible drug use. Eventually, Zerocoin will make sense for these people as well.
Until then, Big Blockchain will be watching.