A top 20 altcoin, Zcash (ZEC) bills itself as the “first open, permissionless cryptocurrency that can fully protect the privacy of transactions using zero-knowledge cryptography.” The privacy coin removes the capability to ascertain an individual’s identity or payment history.
Passwords & Zero-Knowledge Proofs
The coin’s zero-knowledge proofs enable user authentication without having to exchange passwords. Without such a need, no unauthorized access to a cryptocurrency wallet can occur. In brief, zero-knowledge proofs enable one party to prove that they possess knowledge about a secret to a second party – without actually revealing the secret.
By using the term ‘zero-knowledge,’ Zcash is referring to the fact that no knowledge about that secret is ever revealed. Nonetheless, the second party (the “Verifier”) is convinced that the individual (the “Prover”) knows the secret despite there being no interaction between the two parties. For a more detailed explanation, a highly popular video explaining zero-knowledge proofs can be viewed here.
Encryption with zk-SNARKs
A zk-SNARK (zero-knowledge Succinct Non-Interactive Arguments of Knowledge) is a zero-knowledge proof as it applies to computational data. Or, as Coindesk puts it, proving a computational fact about data without revealing the data. Zcash uses this particular zero-knowledge proof to “encrypt all of the data and only gives decryption keys to authorized parties to see that data.” As Coindesk explains, this could not be done before on a public blockchain because,
if you encrypted everything in the past it would prevent miners from checking to see if transactions are valid. Zero-knowledge proofs have made this possible by allowing the creator of a transaction to make a proof that the transaction is true without revealing the sender’s address, the receiver’s address and the transaction amount.
And verification using zk-SNARK proofs is gaining traction. Just recently, Ethereum implemented zk-SNARK proofs as part of its Byzantium upgrade.
In May, J.P. Morgan decided to integrate Zcash into its enterprise blockchain platform, Quorum. The platform is designed for institutional financial markets and is heavily reliant upon confidentiality. Any trading information released deliberately or accidentally may serve to undermine a corporation’s competitiveness. The company believes they can alleviate such risk by adding what is called a zero-knowledge security layer into Quorum.
Also in mid-May, the Winklevoss twins’ Gemini cryptocurrency exchange became what it calls the ‘World’s First Licensed Zcash Exchange.’ The exchange gained formal approval to list Zcash from the New York State Department of Financial Services. The move heralded the first time a privacy coin gained acceptance by a regulatory body. More recently, Coinbase announced that it was reviewing whether to list ZCash in its exchange. As Coinbase is the most legally compliant exchange within the US, such an announcement would help legitimize privacy coins among federal regulators
With its zero-knowledge protocol, Zcash continues to gain the attention of privacy advocates – both on an institutional and individual basis. However, its Achilles heel has less to do with its technology per se than simply being a privacy coin. Nonetheless, such questions may soon be moot.