Crypto, Privacy & Money
In honor and preparation of the inaugural Zcash conference this week, ZconI think it’s worth looking at why privacy is a core tenet of the cryptocurrency movement. As some may recall, Loopring Foundation and UC Berkeley entered into a research partnership, led by Prof. Alessandro Chiesa co-founder of Zcash, with a view towards eventually implementing zero-knowledge proofs in the Loopring Protocol.
It seems there is something in the air today, or this week, that is compelling crypto market participants and critical thinkers to write about privacy. Perhaps it is indeed in anticipation of the 3-day privacy-focused conference, or perhaps it is the censorious actions that occurred on the EOS chain; arbitrarily freezing 7 accounts, “for logic and reasoning to be discussed at a later date.”
Coincidentally, in my inbox on Sunday morning, my weekly dose of Farnam Street ‘brainfood’ contained this short article which reiterates the importance of privacy and rebuffs the oft-cited counterpoint of, “If you’ve got nothing to hide, you’ve got nothing to fear.” The post shows how this argument misses the point, and how exhausting it is to refute.
The most common defense against this ill-conceived argument, however, comes from perhaps the most famous privacy advocate, Edward Snowden:
“Arguing that you don’t care about the right to privacy because you have nothing to hide is no different than saying you don’t care about free speech because you have nothing to say.”
Later in the day, Coindesk’s Michael J. Casey’s weekly piece centered on privacy’s foundational role in cryptocurrency. Specifically, he expounds on the concept of fungibility: the property of one unit of a commodity (currency) being perfectly interchangeable with another. This means you are indifferent between receiving US dollar bill ‘A’, and US dollar bill ‘B’. The fact that dollar bills are indistinct from each other is what makes them a good ‘money’. Imagine the headache of having to ascertain the heritage and history of every dollar you transact with, physical or digital.
Although Bitcoin was once viewed as the money of choice for the underworld and nefarious actors, any user that has spent one hour learning about Bitcoin knows that it is in fact the most public and brightly-lit money ever invented.
This was/is a compromise that Satoshi’s innovation has to deal with. Zerocoin protocol — the germ from which Zcash eventually sprouted — states in its whitepaper, regarding Bitcoin:
“Because the block chain is massively replicated by mutually-distrustful peers, the information it contains is public.”
Every bitcoin can be traced from address to address, forever. Although these addresses are pseudonymous, they can be de-anonymized — through user negligence or willful technology — and users’ transactions and wealth can be discerned. With a perfect digital trail of money, if some actor were to flag the bitcoins in account ‘X’ with a black mark, fungibility is lost, and so is the aspiration of perfect money (if such a thing exists). This does not only affect ‘criminals’ whose actions begot the mark but unsuspecting merchants or traders who unknowingly possess them down the line.
Casey states that “Imperfect fungibility means that people will tend toward holding bitcoin as a speculative asset rather than using it as a medium of exchange.”
A related but imperfect point is how this relates to Gresham’s Law: the principle that bad money drives out good. If such a distinction should exist in the monetary base, rational users will hoard their ‘good’ bitcoins, and only want to use ‘bad’ bitcoins day to day. This bifurcation will not only place a premium on the good money, but generally hurt the real bitcoin economy.
As Chris Burniske and Jack Tatar explain in their book Cryptoassets:
“A danger for bitcoin, especially for balances known to have been used for illegal activity, is that if an exchange or other service blacklists that balance, then that balance becomes illiquid and arguably less valuable than other balances of bitcoin…losing fungibility could be the demise of a digital and distributed currency, hurting the value of all units, not just the ones used for illegal activities.”
With this in mind, some cryptocurrencies aim to preserve privacy with zero-knowledge cryptography. Zero-knowledge proofs allow one party to prove to another that a statement is true, without revealing any information beyond the validity of the statement itself. For example, given the hash of some number, the prover could convince the verifier that there is indeed a number with this hash value — and that they know it — without revealing what it is.
Casey asserted of such cryptographic techniques:
“…the debate over their value to society is too narrowly viewed as a battle between privacy as a human right on the one hand and society’s need to prevent criminality on the other. But serious cryptographers working on these tools make a bigger and more important claim: privacy is needed to enhance the “moneyness” of cryptocurrency.”
[Note: Bitcoin devs are working on their own privacy solutions.]
Of course, I’d like to tie the Loopring Protocol into these thoughts :).
While Loopring is not an innately privacy-focused protocol, it is a trust-minimizing and liquidity-enhancing protocol — both of which have a similar goal as privacy considerations: economic freedom. With the ability to trade directly from your wallet without having to trust a custodian, and without being censored or disadvantaged by centralized exchange operators, users can more fully express their economic ideas. In addition, trading through Loopring-integrated wallets on the Ethereum blockchain may be done pseudonymously, without having to give your name/email/passport to an exchange authority.
Thus, notwithstanding the future research into zero-knowledge proofs which would strengthen the protocol’s privacy guarantees, Loopring in its current form already propels users towards a more open economic system.
I don’t mean to conflate pseudonymity with anonymity, nor trustlessness with privacy, but simply wish to assert that on a spectrum, perhaps generically labeled constrained vs unconstrained, decentralization takes us closer to the latter, however imperfectly, and that’s where ‘we’ want to be.
Finally, getting philosophical for just a minute on decentralization and money, I point to Yuval Harari in his book Sapiens:
Money is based on two universal principles:
a. Universal convertibility
b. Universal trust
Regarding point ‘b’: I believe he means, specifically, your belief/trust that other people believe/trust in the same money (he states just prior that “money is the most efficient system of mutual trust ever devised”…and just after that, “whereas religion asks us to believe something, money asks us to believe that other people believe in something”).
A higher-order requirement for this to be the case is that it is ‘good money’ and indeed inspires belief. A replacement of trusting the source of good money is that you mustn’t trust anything or anyone at all! Pure trustlessness is (in some backward sense) akin to pure trust. Thus, to the extent that Bitcoin, or, for Loopring’s case, Ethereum/NEO/Qtum blockchains are trustless, and by extension, so are Loopring’s smart contracts — it is a strong conduit for money, or value, to pass through.
And speaking to convertibility, a recent tweet caught my eye by Qiao Wang of Messari, pondering on what makes a good Store of Value — he proposes that low cost of conversion is a necessary ingredient (along with immunity to theft, and credibly low inflation).
Of course, Loopring protocol is universal convertibility — it is a decentralized exchange protocol.
Disclaimer: I recently joined Loopring as the Director of Business Development. Please feel free to reach out to me at matthew@loopring.org to learn how you can get involved in the Loopring ecosystem.
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