Over the last several years, the number of digital currencies has skyrocketed. While some of these have developed substantial market capitalizations and carved out their own unique niches, few have shown promise for offering users a high level of privacy and fungibility.
Bitcoin, which had its genesis block mined in 2009, was the first digital currency to scale. While many early adopters took interest in bitcoin because of its promise of privacy, the digital currency failed to provide this benefit, as interested parties can look examine the transactions recorded on bitcoin’s blockchain to get a sense of exactly what a person or entity has purchased.
In the years following bitcoin’s release, developers have created privacy-oriented digital currencies including Dash and Monero. Both of these use innovative technologies to help increase the chances of their users remaining anonymous.
Dash leverages a technique called “CoinJoin”, in which several users put funds into the same transaction in order to increase the chances of privacy. Alternatively, Monero harnesses ring signatures to reduce the chance of detection.
Both of these cryptocurrencies have made great progress toward realizing the goal of anonymous transactions, and Monero has received widespread adoption in the dark web.
However, Zcash’s technology seemingly gives users the ability to enjoy an even greater level of privacy. By allowing users to remain anonymous, Zcash can provide them with greater fungibility.
This is because many digital currency transactions rely on the use of private keys – strings of letters and numbers that identifies a user. And an address can become attached to several transactions over time, making it easy for friends, family, marketers or even government authorities to learn more about a person’s purchasing trends.
And if a user’s private key is attached to certain transactions, some parties may refuse to accept his or her money. This is where Zcash comes in.
What is Zcash?
Zcash leverages zero-knowledge proof constructions called zk-SNARKs, which allow two users to exchange information without revealing their identities. While the bitcoin blockchain contains records of the participants in a transaction, as well as the amount involved, Zcash’s blockchain shows only that a transaction took place, not who was involved or what the amount was.
Zcash is the result of continuous efforts by developers to create cryptographic protocols that offer greater privacy. Zooko Wilcox has founded and served as CEO of both Zcash and the Zerocoin Electric Coin Company, which created a protocol named Zerocoin between 2013 and 2014.
The developers involved started the Zerocoin project to address the security limitations of bitcoin. The protocol they created allowed users to convert bitcoin to zerocoins, which provided a greater level of anonymity by concealing the origin of a payment. The protocol allowed users to split up or alternatively merge zerocoins, and also convert them back to bitcoins.
More recently, the aforementioned developers collaborated with cryptographers from MIT, Tel Aviv University and The Technion (Israel Institute of Technology) to create Zerocash – an improved protocol that provided payments with greater privacy than offered by Zerocoin, and has been developed into the cryptocurrency Zcash.
Zerocash offers zerocoins, which help users insure privacy, as well as basecoins, which do not have the extra privacy features.
Under the Zerocash protocol, users have the ability to conceal both the senders and recipients involved in transactions, as well as the amounts transmitted. The Zcash staff refrain from describing the new technology as anonymous, although in most cases, the technology has that quality.
One major benefit that has stemmed from this greater level of anonymity is greater fungibility.
Why fungibility matters
Fungibility, the ease with which units of a certain asset can be substituted for one another, is important because it ensures that one person’s money is as good as another’s. When history exists for money, that money may not be accepted for all kinds of transactions.
For example, if a vendor accepts digital currency as payment for their goods, but can easily track the history of the currency it accepts, the vendor can simply reject payment from certain would-be customers based on their prior purchasing behavior.
Bitcoin users have already encountered challenges stemming from the public nature of the blockchain. Some bitcoin exchanges have “blacklisted” or refused to accept of certain bitcoins after significant amounts of the cryptocurrency were stolen from wallets.
When certain coins are blacklisted in this manner, users are given an additional burden of confirming the origin of these coins. Past that, requiring users to verify a coin’s user history could produce additional problems, for example users finding themselves unable to use a…