There was a time when Bitcoin received a lot of criticism for being difficult to trace. In fact, there was a common misconception going about that it was anonymous, when in fact it was not, as it was only pseudonymous. It has long been proven that Bitcoin transactions could be traced to a particular use, with a little bit of technical understanding and social engineering.
Before this became public knowledge (and many, even regulators, still think that Bitcoin is anonymous), there were teams in the cryptocurrency space that knew Bitcoin was actually pretty ineffectual as a means of private transactions. As a result, several teams began working on offering true privacy to transactions.
Several techniques are employed to offer privacy, and different projects are taking different approaches to shield sender and recipient addresses, as well as transaction amounts. This, unsurprisingly, has lawmakers worried, who believe that this could aid criminal groups in circumventing the law. However, it is important to remember that cash still remains the primary means by which illegal activity is conducted, and that many privacy focused tokens offer both private and public forms of transaction.
The particular project I’m going to talk about today is Zcoin (XZC), a project with a long history and links to another prominent privacy project, Zcash. I’m going to go over Zcash’s history, its purpose and the technique it uses to offer privacy, the challenges it faces, and its partnerships and competitors.
The History of Zcoin (XZC)
Zcoin (XZC) was conceptualized in 2014 by Poramin Insom, who was working on the idea of implementing the zerocoin protocol into a cryptocurrency while at Johns Hopkins University. One of the original Zerocoin whitepaper authors one of Insom’s faculty members, Matthew D. Green. The Zerocoin protocol was intended to bring coin mixing capabilities to the Bitcoin protocol such that it would bring anonymity. Early investors of the project include Roger Ver and Tim Lee.
Zcoin officially went live in September 2016, and is based on a Proof-of-Work (PoW) scheme.
Although the team has strong links to the zerocoin protocol, the network no longer makes use of the zerocoin protocol, having moved to the Sigma Protocol in July 2019. Zcoin is the first true implementation of the Sigma Protocol, a cryptographic technique that can prevent the creation of counterfeit tokens as a result of inflating coin supply. This is something which I’ll talk about later, as the project was subject to an attack that saw the minting of counterfeit tokens from a flaw in the Zerocoin protocol (and this was not the only exploit that was discovered!).
Early efforts for the network included Merkle Tree Proof improvements and the addition of the token to exchanges. The token was added to both Binance and Bittrex in 2017. 2018 was focused more on making improvements to the core protocol, which was revealed to be exploitable in various ways.
The team also integrated The Onion Router (TOR) in 2018, as well as integration with the hardware wallets Ledger and Trezor. This was followed by the implementation of Dandelion, a transaction routing mechanism that makes it difficult for the source of a transaction to be discovered.
Perhaps the single biggest change to the project arrived with the implementation of the Sigma Protocol. Implemented in July 2019, the Sigma Protocol, removed trusted setups and reduced the size of zercoin proofs from 25 kB to 1 kB and mint sizes by 75%, consequently improving scalability by a significant amount.
Heading into 2020, the team is shifting its attention to native mobile wallet support, encrypted node communication, smart contracts, scaling solutions, quantum resistance research and governance solutions. The ZCoin roadmap goes into the development agenda in greater detail.
The Purpose of Zcoin (XZC)
Zcoin is through and through a privacy focused token, and was designed with the intention of addressing the related weaknesses that Bitcoin possessed. While it may seem like that a fully private token may circumvent regulation, the team states in the whitepaper that it is possible to maintain anonymity while meeting legal compliance. This again debunks the common misconception that privacy token are methods by which criminal groups can fund their activities.
While both Zcoin and Zcash both use zero knowledge proofs, they are both actually quite different, with Zcoin being based of the Zerocoin paper and Zerocash being based off of the Zerocash paper.
Obviously, Zcoin’s purpose is to provide privacy. It allows users to burn coins to wipe out transaction history and subsequently mint them for new tokens that do not have any transaction history. This is the primary means by which it offers privacy. The use of zero-knowledge proofs is what offers proof that a token was burnt in order to create a new token without a transaction history.
The Sigma Protocol marked a great shift in the project’s technical aspects. In effect, it is a wholly different philosophical direction for the project. The team describes it as a “compelling alternative to zk-SNARKs” that “combines the high privacy of zero knowledge proof schemes without many of its associated drawbacks.”
The Sigma Protocol brings 3 major changes to the network: a removal of the trusted setup, reduction of proof sizes from 25 kB to 1.5kB, and improved security. The reduction in proof sizes means that more transactions can be fit into a single block, thereby increasing scalability. The removal of the trusted setup eliminates the use of a master private key, which could have been attacked and used to generate an infinite number of coins.
Two additional points worth mentioning are the fact that the network has implemented both TOR and Dandelion, two routing mechanisms that provide a further layer of privacy. TOR is a popular routing protocol that is used to hide the IP address of a user, and Dandelion changes the way transactions are spread across the network. The team says that the two features complement each other.
The Zerocoin whitepaper does a good job of describing the motivation for the creation of the token, as well as the technical underpinnings of the project.
Zcoin has undergone some significant issues over the course of its lifespan. These problems were quite severe and brought a lot of scrutiny to the Zcoin protocol.
The first of these occurred in 2017, and saw attackers create 370,000 Zcoin tokens that were later sold, as Bitcoin, for $440,000. The team responded to this attack in a detailed blog post - which occurred because of a single extra character in the code.
The second flaw, which was discovered in April 2018, was a denial of service bug that allowed attackers to create coins, as well as burn the coins of honest users. The problem was not fixed even 2 months after it had been discovered.
The transition to the Sigma protocol has addressed these issues, but Zcoin’s reputation did definitely take a hit with these attacks.
Zcoin does not have many partners to speak of, as is the case with most privacy focused projects.
One notable partnership that the project does have is that with Travala.com, the travel booking platform. The partnership will let users of the platform pay for the bookings in Zcoin. Travala allows users to pay for bookings in 90,000 destinations worldwide. The travel industry has been known to be one of the most lucrative applications for cryptocurrencies, and Travala itself has been very keen on making cryptocurrencies a means of payment.
Zcoin has also partnered with PolisPay. The latter is a company that released a debit card that allows people to spend cryptocurrencies. The partnership saw Zcoin become one of those spendable cryptocurrencies.
Lastly, Zcoin has partnered with HummingBot as a Liquidity Mining launch partner, with the intention of making market making more transparent. Humminbot is an open source software for open finance that helps users build high-frequency crypto trading bots.
The privacy niche is arguably one of the most competitive niches in the cryptocurrency space, with several projects already present in the space, and most taking their own approach to the project. Besides zero-knowledge proofs, there is also CoinJoin and Ring Confidential Transactions (RingCT), both of which are seeing traction as tools for providing privacy.
The two most notable privacy tokens are Monero (XMR) and Zcash (ZEC), both of which have seen great use and/or support from the cryptocurrency community. Zcash has even seen some mentioning from the likes of Edward Snowden, who has generally shown a lot of support for cryptocurrencies.
Privacy coins are undoubtedly a major niche in the cryptocurrency market and the several projects and approaches that exist are a testament to that. There is a definite demand for privacy tokens, so Zcash could possibly have a very strong future.
Now, as for whether it can actually take a greater share of the market, as opposed to the more popular tokens that are Monero and Zcash, remains to be seen. It has undergone some difficult times, and that has no doubt played a part in the drop of its market share - it was once in the top 20, and is now not even in the top 100.
So, it is not quite as popular and with the greatest support, but it is worth keeping an eye on the ZCash token. There is a lot of time left before privacy tokens become such a phenomenon that those specific users who need private transactions will reach a threshold. After all, we will first see the growth of Bitcoin before people turn to this specific offering.