[header date=”15 January 2019″]A magical new protocol may offer a scalable privacy coin for the masses, Gemini keeps its head, and the Ethereum Foundation delays the difficulty bomb.[/header]
Privacy is the new black
The purpose of cryptocurrency is being redefined by the emergence of privacy coins, decentralized digital currencies designed to keep their users anonymous.
When Satoshi Nakamoto created bitcoin in the wake of the 2008 financial crisis, he (or she, or they) envisioned it as a way to avoid banking through the conventional financial system. But in the past decade, distrust of institutions has grown to encompass privacy concerns, too. (See: Equifax, Cambridge Analytica.) Thus, some people now see cryptocurrency as a way to ensure their privacy as well as avoid financial intermediaries.
Remember though, when Nakamoto penned the bitcoin white paper, he spent only 200 out of 3,500 words discussing privacy. Bitcoin—by its very design, he acknowledged—is not private. In fact, it relies on extreme transparency. But this was a tradeoff that Nakamoto was willing to make. He wrote:
The traditional banking model achieves a level of privacy by limiting access to information to the parties involved and the trusted third party. The necessity to announce all transactions publicly precludes this method, but privacy can still be maintained by breaking the flow of information in another place: by keeping public keys anonymous.
Unfortunately, as we’ve learned over the past 10 years, keeping public keys anonymous is difficult. Bitcoin holders becomes traceable if they reuse their wallets, and indeed, blockchain forensics companies, like Chainalysis and CipherTrace, have built entire businesses on tracking crypto payments. (Not surprisingly, their clients include the US government.)
If you’re trying to stay anonymous while using bitcoin, you’re going to have to jump through a lot of hoops—VPNs, tumblers, and multiple wallet addresses—and you’ll probably still be tracked down. So, if you’re a privacy freak, using bitcoin isn’t worth it, especially since there are newer cryptocurrencies designed specifically with anonymity in mind.
Zcash and Monero are perhaps the most popular “privacy coins,” which use zk-SNARKS and ring signatures, respectively, to obfuscate their transaction history. Although these cryptos achieve their privacy aims, they’re bogged down by larger blockchains because their encryption methods require adding data, not subtracting it.
That’s why some developers are so excited by Mimblewimble, a protocol which actually removes information to ensure privacy. This seems to make Mimblewimble-based cryptos—such as Beam and Grin, which launches today—even more private and scalable than their predecessors.
Mimblewimble, named after the tongue-tying curse in Harry Potter, was proposed in July 2016 by a bitcoin enthusiast using the pseudonym Tom Elvis Jedusor. (That’s the French name for Potter villain Lord Voldemort—an anagram for Je suis Voldemort.) But the first implementation of Mimblewimble, Beam, didn’t go live until this month, which gave Monero and Zcash time to build up communities and benefit from 2017’s price mania.
“Privacy, financial or otherwise, is a basic human right,” Beam CEO Alexander Zaidelson told Private Key. “Ask 10 people in the street whether they are willing to publicly disclose their bank statements complete with their transaction history. The answer will be a resounding ‘No.’ Same for businesses—no business would want its competitors and customers to see its financial history.”
Mimblewimble-based cryptos may be faster than Monero and Zcash, and their enhanced anonymity could attract users. They still might not take off, however, because the privacy coin market is saturated—for the time being at least—and regulatory concerns could deter US exchanges from listing Beam and Grin.
As bitcoin’s price declines, it’s quickly becoming clear that the next wave of cryptocurrencies will be distinguished by their privacy features and speed, not just their sidestepping of conventional banking infrastructure. While privacy coins remain a niche segment of the crypto market, it’s not hard to imagine the next hype cycle converging on these experimental protocols. —Matthew De Silva
[supplemental headline=”Market chatter: Constantinople”]
An Ethereum hard fork. Upon reaching block number 7,080,000—which the Ethereum Foundation projects will occur on Jan. 16—the Ethereum network will undergo a planned upgrade called Constantinople. You can follow the Constantinople countdown here.
ETH holders don’t need to worry. This is business as usual. Some exchanges, like Coinbase, have announced that trading will remain active during the upgrade, but they will temporarily suspend deposits and withdrawals.
As with any hard fork, there’s a fair amount of uncertainty among traders, which might depress the ETH price for a short period. Assuming all goes well, this seems likely to correct itself.
So, why the update? Constantinople includes five new EIPs, or Ethereum Improvement Proposals. These upgrades make it easier—and typically cheaper—for developers to interact with the network.
The most significant updates are EIP 1014, which allows developers to interact with addresses that haven’t been created yet, and EIP 1234. The latter reduces the block reward for mining and delays the network’s “difficulty bomb,” a provision that developers built into Ethereum, which gradually slows block production time. The difficulty bomb is meant to kill off any remaining proof-of-work version of Ethereum after the network eventually hard forks to a proof-of-stake consensus algorithm.
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On the record: Cameron and Tyler Winklevoss
[img src=”https://cms.qz.com/wp-content/uploads/2019/01/Cameron-and-Tyler-Winklevoss.png”]
Cameron and Tyler Winklevoss don’t need an introduction. The twins turned the proceeds of their lawsuit against Facebook into a paper fortune by investing it in bitcoin. Since then, they co-founded Gemini, a licensed exchange for virtual assets in New York. They spoke with Quartz’s John Detrixhe about the crypto winter, their plans to hire new employees, and their recent ad campaign. This interview has been edited for length.
Quartz: With the decline in valuations, are you looking at any acquisitions?
Cameron: I’m not sure you’re going to see a wave of acquisitions, per se, from Gemini, but we’re going to continue to look for great talent and that is maybe one of the silver linings of the crypto winter, that there are some otherwise amazing people who would otherwise be down a certain project path and have gotten freed up.
Tyler: The crypto winter is a great opportunity. And that may be taking a position in crypto at a good price point. Or it may mean, if you’re an entrepreneur or technologist, to continue to build at a fast clip when others are afraid to get involved or are hesitating. It’s very hard to outpace your competition or be a pioneer when you’re inside of crypto-mania because everyone is chasing that dream. But now it’s an open field, open season.
So you are still adding headcount? There have been layoffs elsewhere.
Cameron: We’re still increasing headcount. Obviously, it’s probably not going to be at the same clip as last year, but we are still actively looking at some key roles and hires. It’s an ongoing process. We have not scaled back or paused or stopped or laid anybody off.
Last year we put on 120 people and we’re continuing to recruit aggressively in almost every area. The one area—operations—is where we just don’t see growth in the same way, but we’re definitely full steam ahead in terms of recruiting in many areas.
Are you able to do that because you’re profitable or because you’re already funded?
Cameron: I think the answer is both, and I think we have been pretty disciplined even during the 2017 mania where everything looked like a good idea.
We didn’t have to tack back and become a compliant or licensed company two years into our journey. A lot of companies have done that, or come back for more licensing, recognizing that what they had was not sufficient or where they wanted to be. When we opened doors, we started as a trust company on day one and we felt that pain of having that regulatory burden and we certainly had to grow into it.
There are many exchanges out there trading unregistered securities. And so those are the things that are the most damaging in terms of your roadmap and trying to build forward, is going down a path or realizing that the DNA of your company, which was unregulated and unlicensed, has to all of the sudden change to a regulated financial services company.
What was your objective with your latest marketing campaign?
Cameron: One of the goals of the campaign is to make people aware that, despite what you may have read, despite what you might have experienced in the past, there are exchanges like Gemini that are trying to do it the right way and afford consumer protection and standards and safety that you would expect and require from any financial institution.
Obviously, we’re not going to please everybody. That’s certainly not the goal. There are definitely some individuals who don’t believe that crypto needs rules or that it’s somehow beyond that. We obviously take a philosophically different viewpoint.
It’s important to also recognize and point out there’s a continuum of cryptocurrency in terms of how people want to engage with the technology. You’re welcome to be completely peer-to-peer and be in sort of a digital cashless universe where you’re never really in the system of a centralized exchange like Gemini.
But we think most people are looking to engage in a place like Gemini, to buy, sell, and store their crypto, and interact with a company that has regulatory oversight. But that doesn’t prevent anybody for whom that’s not their cup of tea to not engage with us. You can opt out of Gemini whenever you want.
Cameron and Tyler’s recommendations:
- Books
Cameron: Snow Crash, by Neal Stephenson
Tyler: Cryptonomicon, by Neal Stephenson - Podcasts
Cameron: Dead And Lovely
Tyler: The Jocko Podcast - Projects
Cameron: Filecoin
Tyler: Zcash
[mailto filter=”View from and interview feedback” subject=”Feedback”]Know somebody who we should profile? Let us know.[/mailto]
[supplemental headline=”De-jargonizer: Faucet”]
A “faucet” is a website that gives away bitcoin to people who complete a small task, such as filling out a CAPTCHA. Originally, this was a way to get bitcoin in the hands of new users. The first faucet, which gave away 5 bitcoins per visitor, was created in 2010 by bitcoin developer Gavin Andresen (it’s been inactive since 2013). Since bitcoin achieved a meaningful dollar value, few—if any—legitimate faucets remain. However, faucets for testnets remain an important part of cryptocurrency development.
[mailto filter=”Jargon” subject=”De-jargonize this…”]Heard a new crypto term? We can tell you what it means.[/mailto]
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Please send news, tips, and crypto spigots to privatekey@qz.com. If this email was forwarded to you, click here to sign up for your own subscription, which includes a free two-week trial. Today’s Private Key was written by Matthew De Silva and John Detrixhe, and edited by Oliver Staley and Jason Karaian. On the internet, nobody knows you’re a dog.