Posted by: John Vandivier | June 6, 2013

Zerocoin and Bitcoin: Taking Anonymity to the Next Level

Bitcoin has been changing. Drastically. Business Insider says that Bitcoin is selling its soul. Bloomberg, on the other hand, continues the line that bitcoin is a revolution bound to change the world for the better.

What has changed? Basically there are three major events going on in the bitcoin world right now: Mt Gox is involved in a legal scandal and Liberty Reserve and some other similar virtual currency-sh places have been shut down by the government. These events combine to form a fear of high regulation of bitcoin. High regulation of bitcoin would largely defeat the purpose of bitcoin as some of the main purposes include the fact that it is a stateless, impossible to manipulate currency with a large degree of anonymity. Mt Gox has already tightened some requirements to comply with what laws are on the books in the US although Mt Gox is a Japan-based BTC exchange.

Which brings us to the third event. It turns out bitcoin is not as anonymous as we thought it was. Enter Zerocoin. Zerocoin is a proposed modification to the Bitcoin code. According to the linked zerocoin homepage they are expecting to submit it as an official Bitcoin Improvement Proposal this month, June 2013. It acts as a nonstop money laundry inside the blockchain itself. It makes bitcoin fully anonymous. Check the following presentation from one of its creators which was given at the recent Bitcoin 2013 conference:

So what does this imply? A true anonymous currency makes black market transactions significantly easier. Look at this calculator made by angel investor Joshua Seims. According to that calculator, if bitcoin only has a 10% chance of success and, upon success, only captures 5% of the black market and 0% of global currency or value storage, each coin would already be worth over $190. Putting my more realistic assumptions into the calculator I got an estimated worth of about $3300. However zerocoin is a needed step first. Expect the price to increase when the proposal goes through (or even when it is only approved or officially proposed because of speculation).

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