Zcash: A New Cryptocurrency Because Bitcoin is Too Transparent

by Tim Sloane 0

While many of us thought that Bitcoin was problematic because it hides the identity of users, others believe authorities have determined how to trace Bitcoin transactions and so have used zero-knowledge proof algorithms to make it impossible to trace the transactions or the users. It appears this resonates with the market given that Zcash is valued at $498:

“A new cryptocurrency launched late last week, claiming to allow users to make online purchases anonymously and sparking controversy and a negative reaction from the authorities.

Zcash launched last Friday and is currently worth $498 dollars per coin, in comparison to $706 for one bitcoin.

Zcash uses a technique called “zero-knowledge proofs” to ensure coin exchanges are valid but without revealing extra information to either user. It conceals identifying information from the public blockchain – the massive public ledger that records all transactions of a digital currency – which effectively allows Zcash users to make private and anonymous exchanges.

“Companies need the protection of privacy along their supply chain in order to conduct their business, especially in the context of public blockchains,” the Zcash company says on its website.”

Zero-knowledge proofs are finding their way into more software very quickly, so it is worth understanding the basic concept. If my age is in a zero-knowledge proof system, a participant can ask the system if I am over 21 and receive a yes or no answer without divulging my actual age. Mercator first saw this algorithm in action with Evernym, an identity solution which enables consumers to control their identity and release information using the zero-knowledge proof algorithm.

Mercator recently finished a project with TMG and CO-OP Financial Services which resulted in a paper entitled “Are Blockchain Solutions Ready? Three Blockchain Solutions Put to the Test.” It is available at bit.ly/blockchainbrief. The basis for this paper is a strategic decision framework designed to help financial institutions evaluate the impact and implications of blockchain solutions. It is available at bit.ly/blockchainframework. In creating an evaluation matrix for determining how effectively a blockchain solution solves for a specific business use case, Mercator identified 62 key criteria, these two are particularly relevant to the benefit of Zcash:

“11. May data ownership be visible to participants?

13. Is it acceptable if participant transaction volume is disclosed?”

Most blockchain implementations enable all participants to see all transactions on the ledger and each transaction is “owned” by a private key. This participants to recognize how many transactions any one entity has implemented, which is information that financial institutions may not want competitors to know. While Zcash solves that problem, its total secrecy introduces even more problems.

It is also true that Zcash, as with most alternative cryptocurrencies, has not been given a rigorous academic review. NCC Group evaluated the Zcash system for vulnerabilities, but not for sustainability. For example, evaluating the overall strength of the trust algorithm employed by Zcash was not in scope.

Cryptocurrencies and blockchains are at the Model T stage of development. This is an exciting time, but it should be recognized that just as not everybody can be a car maker, few will be capable of creating a sustainable business that is built on blockchain technology. There will be big winners, but there will be many more that fail.

Overview by Tim Sloane, VP, Payments Innovation Advisory Service at Mercator Advisory Group

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