Wow, what the heck is going on with Bitcoin?

When I started this post, the value of a single bitcoin had surged upwards of $250. It’s corrected a bit since then (down $100 or so), but it’s pretty clear that we live in a very different world than we did two weeks ago.

And I’m not sure I really like this world. It’s a world where I have to listen to CNBC reporters try to understand Bitcoin. Ouch. I think we can all agree that we were better off before this happened.

The explosion of interest in Bitcoin is both wonderful and terrible. It’s wonderful because Bitcoin is an amazing technical innovation — the first decentralized electronic currency to actually make something of itself. It’s terrible because Bitcoin has some technical rough edges that really need to be filed off before we start using it for anything.

The rough edge that particularly interests me is user privacy. Or rather, Bitcoin’s troubling lack of it.

In this post I’m going to describe a new piece of research out of my lab at Johns Hopkins that provides one potential solution to this problem. This is joint work led by my hardworking students Ian Miers and Christina Garman, along with my colleague Avi Rubin. Our proposal is called Zerocoin, and we’ll be presenting it at this year’s IEEE S&P.

For those who just want the TL;DR, here it is:

Zerocoin is a new cryptographic extension to Bitcoin that (if adopted) would bring true cryptographic anonymity to Bitcoin. It works at the protocol level and doesn’t require new trusted parties or services. With some engineering, it might (someday) turn Bitcoin into a completely untraceable, anonymous electronic currency.

In the rest of the post I’m going to explain Zerocoin, what it can do for Bitcoin, and how far away that ‘someday‘ might be. This is going to be a long, wonky post, so I won’t be offended if you stop here and take my word that it’s all true.

For everyone else, strap in. I need to start with some background.

Bitcoin in 300 words

Before I get to Zerocoin I need to give the world’s shortest explanation of how Bitcoin works. (See here for a slightly less terrible explanation.)

At its heart, Bitcoin is a transaction network with a distributed public ledger. Transactions are files that contains messages like “User X transfers 3 bitcoins to user Y” and “User Y transfers 2.5 of those bitcoins to user Z”. Users aren’t identified by name. Instead, their identities are public keys for a digital signature scheme.* This allows users to sign their transactions, and makes it very difficult to forge them.

Now none of this stuff is really new. What makes Bitcoin special is the way it maintains the transaction ledger. Rather than storing the whole thing on a single computer, the ledger — called a block chain — is massively replicated and updated by a swarm of mutually distrustful parties running in a peer-to-peer network.

To make this work, nodes pull transactions off of a peer-to-peer broadcast network, then compete for the opportunity to tack them on the end of the chain. To keep one party from dominating this process (and posting bad transations), competition is enforced by making the parties solve hard mathematical problems called ‘proofs of work‘. The integrity of the block chain is enforced using hash chaining, which makes it very difficult to change history.

Now the block chain is fascinating, and if you’re interested in the gory details you should by all means see here. This post mostly isn’t going to get into it. For now all you need to know is that the block chain works like a global ledger. It’s easy to add (valid) transactions at the end, but it’s astonishingly difficult to tamper with the transactions that are already there.

So what’s the problem?

The block chain is Bitcoin’s greatest strength. Unfortunately from a privacy perspective, it’s also the currency’s greatest weakness.

This is because the block chain contains a record of every single Bitcoin transaction that’s ever been conducted. Due to the way Bitcoin works, this information can’t be limited to just a few trustworthy parties, since there are no trusted parties. This means all of your transactions are conducted in public.

Illustration of a Bitcoin block chain. Each transaction is tied to the one that precedes it.

The transaction at far left is almost certainly a drug deal.

In a sense this makes Bitcoin less private than cash, and even worse than credit cards. If you choose to engage in sensitive transactions on Bitcoin, you should be aware that a record will be preserved for all eternity. Spend with care.

Now some will say this is unfair, since Bitcoin users are not identified by name — the only identifier associated with your transactions is your public key. Moreover, you can make as many public keys as you’d like. In other words, Bitcoin offers privacy through pseudonymity, which some argue is almost as good as the real thing.

But don’t get too comfortable. Already several academic works have succeeded in de-anonymizing Bitcoin transactions. And this work is just getting started. You see, there’s an entire subfield of computer science that can roughly be described as ‘pulling information out of things that look exactly like the Bitcoin transaction graph’, and while these researchers haven’t done much to Bitcoin yet — that’s only because they’re still fighting over the grant money. We will see more.

If you’re a Bitcoin user who values your privacy, this should worry you. The worst part is that right now your options are somewhat limited. Roughly speaking, they are:

Just be careful. Generate lots of public keys and make sure your client software is extremely careful not to use them in ways that could tie one to another (e.g., getting ‘change’ from one key sent to another). This seems to be the major privacy thrust of the current Bitcoin development effort, and we’re all waiting to see how it pans out.

Use a laundry. For the more paranoid, there are services called ‘laundries‘ that take in bitcoins from a whole bunch of users, mix them up and shuffle them back out. In theory this makes it hard to track your money. Unfortunately, laundries suffer from a few problems. First, they only work well if lots of people are using them, and today’s laundries have relatively low volume. More importantly, you’re entirely dependent on the honesty and goodwill of the laundry itself. A dishonest (or hacked) laundry can steal your coins, or even trace its inputs and outputs — which could completely undermine your privacy.

Use a Chaumian e-cash system. On the wonkier side, there have been attempts to implement real anonymous cryptographic e-Cash for Bitcoin. I’ve written about these systems before and while I think they’re neat, the existing schemes (from Chaum on forward) have one critical flaw: they all rely on a central ‘bank’ to issue and redeem e-Cash tokens. The need for this bank has been a major stumbling block in getting these systems up and running, and it’s almost unworkable for Bitcoin — since trusted parties are antithetical to Bitcoin’s decentralized nature.

In short, the current solutions aren’t perfect. It would be awfully nice if we had something better. Something with the power of cryptographic e-Cash, but without the need to change Bitcoin’s network model. And this is where Zerocoin comes in.

Zerocoin

Zerocoin is not intended as a replacement for Bitcoin. It’s actually a separate anonymous currency that’s designed to live side-by-side with Bitcoin on the same block chain. Zerocoins are fully exchangeable on a one-to-one basis with bitcoins, which means (in principle) you can use them with existing merchants.

Zerocoins themselves can be thought of literally as coins. They’re issued in a fixed denomination (for example, 1 BTC), and any user can purchase a zerocoin in exchange for the correct quantity of bitcoin. This purchase is done by placing a special new ‘Zerocoin Mint’ transaction onto the block chain.

Once a Mint transaction has been accepted by the Bitcoin peers, the same user can later redeem her zerocoin back into bitcoins. She simply embeds a (preferably new) destination Bitcoin address into a ‘Zerocoin Spend’ transaction, then sends it into the network. If the transaction checks out, the Bitcoin peers will treat it just like a normal Bitcoin transfer — meaning that she’ll receive the full bitcoin value of the coin (minus transaction fees) at the destination address.

Now you’re probably wondering what any of this has to do with privacy. To explain that, I need to give you one more piece of information:

Aside from educated guesswork, there’s no way to link a Zerocoin Mint transaction to the Zerocoin Spend transaction that redeems it.

Redeeming a zerocoin gives you a completely different set of bitcoins than the ones you used to purchase it. In fact, you can think of Zerocoin like the world’s biggest laundry — one that can handle millions of users, has no trusted party, and can’t be compromised. Once as user converts her bitcoins into zerocoins, it’s very hard to determine where she took them back out. Their funds are mixed up with all of the other users who also created zerocoins. And that’s a pretty powerful guarantee.

Illustration of a Bitcoin/Zerocoin block chain. A user transforms bitcoins into a zerocoin,

then (at some unspecified later point) ‘Spends’ it to redeem the bitcoins. The linkage between Mint

and Spend (dotted line) cannot be determined from the block chain data.

The key to the whole process is to make it all work at the protocol level — meaning, without adding new trusted parties. And doing that is the goal of Zerocoin.

How does it work?

Zerocoin uses a combination of digital commitments, one-way accumulators and zero-knowledge proofs, and some extensions to the existing Bitcoin protocol. It also shares some similarities to a previous work by Sander and Ta-Shma. For the details, you can see our paper. Here I’m going to try to give a very high-level intuition that avoids the muck.

The key idea in Zerocoin is that each coin commits to (read: encrypts) a random serial number. These coins are easy to create — all you need to do is pick the serial number and run a fast commitment algorithm to wrap this up in a coin. The commitment works like encryption, in that the resulting coin completely hides the serial number . At the same time this coin ‘binds’ you to the number you’ve chosen. The serial number is secret, and it stays with you.

To ‘Mint’ the new coin you post it to the network along with a standard Bitcoin transaction containing enough (normal) bitcoins to ‘pay for’ it. The Mint transaction adds some new messages to the Bitcoin protocol, but fundamentally there’s no magic here. The Bitcoin network will accept the transaction into the block chain as long as the input bitcoins check out.**

The Zerocoin ‘Spend’ transaction is a little bit more complicated. To redeem your zerocoin, you first create a new transaction that contains the coin’s serial number (remember that you kept it secret after you made the coin). You also attach a zero-knowledge proof of the following two statements:

You previously posted a valid zerocoin on the block chain. This particular zerocoin contained the serial number you put in your transaction.

The key to making this all work is that zero-knowledge proof. What you need to know about these is that anyone can verify such a proof, and she’ll be absolutely convinced that you’re telling the truth about these statements. At the same time, the proof reveals absolutely no other information (hence the ‘zero’ knowledge).

This means anyone who sees your Spend transaction will be convinced that you really did previously Mint a zerocoin, and that it contained the serial number you just revealed. They can then check the block chain to make sure that particular serial number has never been Spent before. At the same time, the zero knowledge property ensures that they they have absolutely no idea which zerocoin you’re actually spending. The number of such coins could easily run into the millions.

All of this leads us to one final question: where do your bitcoins go after you Mint a zerocoin, and how do you get them back when you Spend?

The simple answer is that they don’t go anywhere at all. The bitcoins used in a ‘Mint’ transaction just sit there on the block chain. The Zerocoin protocol semantics require that nobody can access those coins again except by publishing a valid Zerocoin ‘Spend’. When you publish a Spend, the protocol allows you to ‘claim’ any of the previously-committed bitcoins — regardless of who posted them. In other words, you Mint with one set of bitcoins, and you leave with someone else’s.

When will Zerocoin be available?

For those looking to use Zerocoin tomorrow, I would advise patience. We’ve written a proof-of-concept implementation that extends the C++ bitcoind client to support Zerocoin, and we’ll be releasing a cleaned up version of our code when we present the paper in May. (Update: available here.)

But before you get excited, I need to point out some pretty serious caveats.

First of all, Zerocoin is not cheap. Our current zero-knowledge proof averages around 40KB, and take nearly two seconds to verify. By the standards of advanced crypto primitives this is fantastic. At the same time, it poses some pretty serious engineering challenges — not least of which is: where do you store all these proofs?

This probably isn’t the end of the world. For one thing, it seems likely that we’ll be able to reduce the size and cost of verifying the proof, and we think that even the current proof could be made to work with some careful engineering. Still, Zerocoin as currently construed is probably not going to go online anytime soon. But some version of Zerocoin might be ready in the near future.

Another problem with Zerocoin is the difficulty of incrementally deploying it. Supporting the new Mint and Spend functionality requires changes to every Bitcoin client. That’s a big deal, and it’s unlikely that the Bitcoin folks are going to accept a unilateral protocol change without some serious pushback. But even this isn’t a dealbreaker: it should be possible to start Zerocoin off using some training wheels — using a trusted central party to assist with the process, until enough Bitcoin clients trust it and are willing to support it natively.

In fact, one of the biggest barriers to adoption is human beings themselves. As complicated as Bitcoin is, you can explain the crypto even to non-experts. This makes people happy. Unfortunately Zerocoin is a different animal. It will take time to convince people that these new techniques are safe. We hope to be there when it happens.

In conclusion

I realize that this blog post has run slightly longer than usual. Thanks for sticking with me!

As regular readers of this blog know, I have a passion for anything that gets interesting crypto out into the world. Bitcoin is a great example of this. It would be wonderful if this gave us an opportunity to do even more interesting things. Perfectly untraceable e-Cash would definitely fit that bill.

But even if we don’t get there, the fact that reputable computer science conferences are accepting papers about ‘that crazy Bitcoin thing’ tells you a lot about how much it’s grown up. In the long run, this is good news for everyone.

Notes:

* There are a lot of simplifications in here. Identities are the hash of your public key. The block chain is really computed using a Merkle tree for efficiency reasons. The peer-to-peer network isn’t quite a broadcast network. Did I mention you should read the paper?

** Note that for those who ‘know’ their Bitcoin, you can think of the Zerocoin as a piece of extra data that gets added to a Bitcoin transaction. The inputs are still standard bitcoins. There’s just no output. Instead, the transaction contains the coin data.