Episode #9: Privacy Coins Explained

A deep dive into Monero (XMR) and Zcash (ZEC)

Coin Talk
Coin Talk
Feb 20, 2018 · 41 min read

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COIN TALK is produced in partnership with Medium and hosted by Aaron Lammer and Jay Caspian Kang. Press “Listen to the story” above to play the episode or read the transcript below. (You can also subscribe on Apple Podcasts, download the MP3, or email us at hi@cointalk.show)

In this episode

  • What coin fungibility and anonymity really mean
  • How privacy coins differ from Bitcoin — and whether Bitcoin might add those features as a secondary layer in the future
  • Whether the association of Monero with dark net markets and money laundering is good or bad for price
  • How academic research led to defining privacy features of Monero (Ring Signatures) and Zcash (ZSnarks) and how they work (actually we don’t really understand, but we try!)

Transcript (57 minutes)

Robot: This episode was taped Thursday February 15 at 2:00 p.m. Eastern Standard Time. The Bitcoin Price Index was $10,085

Aaron Lammer: Coin talk, back in your ear again.

Jay Kang: Yeah, what’s up Aaron.

Aaron Lammer: This is our first rally show.

Jay Kang: Yeah, actually this is the first one.

Aaron Lammer: We’re rallying in real time right now.

Jay Kang: Yeah. When Bitcoin hit 10000 for the first time, that was one of our basement tapes, right?

Aaron Lammer: Yeah, that was a basement tapes episode and we were like, this is crazy. That was literally like two and a half months ago or something?

Jay Kang: I think it was sometime in December.

Aaron Lammer: In December? Yeah we were like, we’re always going to remember where we were when Bitcoin hit 10000.

Jay Kang: Yeah and here we are in the same exact seats.

Aaron Lammer: Will you remember where you were when Bitcoin hit 10000 the second time.

Jay Kang: I really hope not.

Aaron Lammer: The rally’s pretty nascent so I feel like I don’t have that much to say about the rally. Do you?

Jay Kang: No, no.

Aaron Lammer: Well you were just telling me that you thought it was going to go back down again but.

Jay Kang: Well I thought that perhaps this might be one of the, you know how in the market cycle chart, like the classic chart of what a market cycle looks like, that there’s always this little tiny spike back up before it goes [crosstalk 00:02:20]

Aaron Lammer: Yes. Is that what’s referred to as a bull trap?

Jay Kang: Yeah, well I think bull trap is slightly different but I think it’s sort of like a false optimism.

Aaron Lammer: I like to think about myself as the kind of person who learns financial terms and then misuses them.

Jay Kang: Yeah. No, no. I mean that’s how I am about most terms in general.

Aaron Lammer: Yeah.

Jay Kang: That’s the whole new language of the internet I think. It’s using highly technical terms or sort of pseudo intellectual terms and then misusing them.

Aaron Lammer: It’s like how I’ve probably heard people talk about like a nickel formation in football like 10000 times. Still no idea what that means.

Jay Kang: It means you have an extra defensive back, which is called the nickel back.

Aaron Lammer: Thank you.

Jay Kang: Yeah yeah. You have five defensive backs and the fifth one is called the nickel back because five is a nickel.

Aaron Lammer: Got it.

Jay Kang: I know that from Madden.

Aaron Lammer: Okay yeah.

Jay Kang: Or you know how people are using now the phrase postmodernism in insane ways so like we do that with Bitcoin we say this is a ball trap.

Aaron Lammer: Right. Right.

Jay Kang: This is capitulation mode.

Aaron Lammer: So you’re saying it could go down and honestly, like I didn’t have any idea where Bitcoin was going at 7500 and I don’t have any idea where it’s going now but I will say we were discussing whether it was better for the show if Bitcoin went up or down. And I feel like it’s pretty fun doing the show when Bitcoin’s going up.

Jay Kang: I will say-

Aaron Lammer: I’m jazzed.

Jay Kang: Let’s try to get a little bit more but I do think the fact that we’re doing this show is evidence that we’re excited about Bitcoin again, which I definitely am.

Aaron Lammer: Absolutely.

Jay Kang: Not that I wasn’t excited about it before but it does kind of hurt a little bit when there’s this sort of looming disaster at the back of your mind all the time.

Aaron Lammer: I will say having gone down below 10000, that in the winter the Crypto winter, which we don’t know if it’s over or not, I did start thinking a lot less about shit coins and a lot more about sort of like fundamentals and like what could really survive an extended freeze. Which brings us to what I think the theme of today’s show is going to be, which is we want to talk about privacy coins. We started talking about them a little bit at the end of the last episode when we had Adrian Chan on. Check that out if you haven’t yet checked it out. But I think we’re going to try and do like a deep dive into the two biggest privacy coins if we have time.

Jay Kang: Yes I think that this is part of our mission when we started the podcast, which was to ask two guys who are relatively new to Bitcoin but who do have some background in explaining things I guess.

Aaron Lammer: Let’s just say we have no real background in anything other than like, I think we’re both known as people who would waste way too much time on a hobby.

Jay Kang: Yes. So as obsessives, that we would want to bring some of that stuff that we know to the audience who might not know these things.

Aaron Lammer: Yeah sure.

Jay Kang: And so yeah I think that we’re going to play a little bit of a game today.

Aaron Lammer: I’ve been a fan of Monero and we’ve definitely talked a lot about Monero and ZCash, they were amongst the first coins that we got into. But I think what we’re going to do is maybe I’ll explain Monero to you, you can explain ZCash a bit to me. I was surprised when I actually started doing like a tiny bit of research about how little I actually knew. You can feel like you know about a coin because you’ve had it in your block folio for like two months but I hadn’t even done really much of the basic research.

Jay Kang: Okay, so you are going to explain Monero to me, right?

Aaron Lammer: Yes and you in turn will have an opportunity to explain ZCash to me.

Jay Kang: OK so let me start by telling you what I know about Monero, which is very little. I know that it is a privacy coin. I know that it has the best reputation of all the privacy coins. I know that it seems to be right now completely untraceable and that it has a large application on dark web or dark markets so people tend to use it-

Aaron Lammer: Dark winged duck.

Jay Kang: People actually do use it, which is very rare for a cryptocurrency.

Aaron Lammer: Yeah I think if we did like a leader board of real time transactions, I don’t know if this exists or not, Monero would definitely be in the top five I think in terms of there is actually money flowing somewhere that’s not exchanges for this token.

Jay Kang: And I think that given that it’s used I can safely assume that it’s generally used for things that are not legal.

Aaron Lammer: Now that’s something I think we will want to get to.

Jay Kang: That’s it, that’s all I know.

Aaron Lammer: Yeah. Right on.

Jay Kang: So what do I not know?

Aaron Lammer: All right well let’s start off, we haven’t really done news yet, but I’m going to throw you two news items that both have Monero nested within them like a Russian doll and I think those can maybe serve as an introduction to some of the stuff that’s happening and is unique about Monero. So the first thing, I don’t know if you caught this, that Salon.com, noted classic Internet journalism site, that a fair description?

Jay Kang: Yes, neo-liberal.

Aaron Lammer: Neo-liberal journalism site. So you know those like pop ups when you go to a site and you have an ad blocker on it will do a pop up that’s like hey you need to turn that off.

Jay Kang: Yeah, GQ being like can you white list us and generally I say , ah I’m just not going to read this.

Aaron Lammer: Yeah. So when you go right now to Salon with an ad blocker on this pops up and it says you either turn your Ad Blocker off or we’re going to use a bit of your unused browser power to mine crypto currencies. First of all I’d say there is no funnier publisher that could do this than Salon.com.

Jay Kang: Oh my God.

Aaron Lammer: It’s been widely reported that it’s mining Bitcoin. It doesn’t actually say what it’s mining, but I think we both know it’s probably not actually mining Bitcoin because that wouldn’t work.

Jay Kang: Yeah they must be mining Monero because it’s passive. I mean look, last week we talked to Adrian about Bail Block, which is a project put on by theNew Inquiry where they are asking people to passively mine Monero to try and raise cash bail for people in the Bronx. So these ideas of how to use crypto currency, mining passively and use a lot of people’s different computers to raise money is certainly one that seems to be catching on. I actually think it’s probably better for the crypto space. The only thing that I’ll say is that I can’t think of, I mean good lord like what, like Salon, what are they doing. Like how would anybody say okay to that.

Aaron Lammer: Well okay. I could see it having bent a different way. Most of the Internet has reacted the way you reacted so you clearly are in the, you are doing what you would normally do which is disagree with Salon.com. I feel like if some futuristic tech publication did this, you know like if the Virge did this, people be like oh that’s so cool what like a great new business plan to like monetize.

Jay Kang: No, no, no, I don’t think I would with the Verge. I think that if a Bitcoin related sort of insurrectionary or anarchist publication did this, I don’t think these exist yet, I’m sure they do but if like somebody really wanted to-

Aaron Lammer: What if the the new inquiry did it? Like the new inquiry said they were going to fund themselves. Yeah I feel like it’s a little bit of a question of scale. If it was a small enough enterprise and you really felt like they could change their whole fortune by doing this, I don’t know there’s something kind of inspiring about it to me.

Jay Kang: Or one that’s really generally been fed by user contributions like the new inquiry that has politics that make it difficult to market to mainstream advertisers, which is certainly not true of Salon. And so yes the Salon part of it is the actual problem.

Aaron Lammer: So it’s not an accident that both Salon and the New Inquiry project Bail Bloc gravitated towards Monero. But it’s not like Monero is designing itself to be used by nonprofits, like that couldn’t be further from the truth. So when we unpack why this has happened, it all goes back to the crypto night proof of work hash algorithm, which is the algorithm that you can use to mine Monero. It comes originally from the crypto note protocol. I’m just saying words at this point but what’s really different about it than what we’re used to in mining, which is like I’m picturing like a giant Chinese factory with just rows and rows of graphics chips it says, and this is a quote, resistant to application specific integrated circuit.

Jay Kang: So asics.

Aaron Lammer: So basically asic which is just a super optimized chip that has very few applications other than Bitcoin mining and 3D graphics basically excludes anyone who doesn’t have that. And this by resisting that, not actually saying this is better to mine on simpler, potentially older computers, it’s just saying we’re not going to give an edge to any of these asic type chips.

Jay Kang: Okay so remind me why that’s important.

Aaron Lammer: Well, people have said that mining for Monero and other currencies that use this crypto night protocol kryptonite proof of work hash algorithm rather is more democratic because average people with normal computers, even extra processing power in the browser can be used to mine it whereas the bulk of the Bitcoin mining in the world is done by professional miners with professional equipment, which creates a very different incentive for the miners and more or less excludes the users from becoming miners unless they want to make a significant investment.

Jay Kang: So it’s like one of these leagues of basketball where nobody can be over six feet tall.

Aaron Lammer: Yes exactly. Or yeah that’s a really good example actually. I’m not going to throw one out because it will be worse than that. So I don’t know why the original makers of Monero made this decision. It may have been just to not compete with big mining operations but it’s had all these potentially unexpected effects. Now another thing I didn’t know, I had always heard that Monero was a fork of Bitecoin and I didn’t really, are you familiar with Bitecoin? You ever had any Bitecoin in your bag?

Jay Kang: No but I think I had read about it a little bit but go ahead.

Aaron Lammer: So as best I can understand it Bitecoin was something of a, not academic but almost like a skunk works project by a single person. And by the time Bitecoin got out people were really impressed, they’re like this is a very mature project that seems like someone’s been working on the code base for years. The person behind it was anonymous, 80 percent of the coins had already been mined. So people sort of looked up Bitecoin and said this is a really good project we could really go somewhere, there’s a lot of interesting novel ideas in it but it’s never going to take off of 80 percent of the coins already mined. So they are hard forked it into a product called Bit Monero and then five days later there was some sort of a feud and the bit Monero team split off from the Monero team with yet another hard fork, which became what is known as Monero today.

Jay Kang: It’s like the Facebook.

Aaron Lammer: Yeah, yeah except there’s one extra backstabbing in the middle. And one thing I didn’t know was that it wasn’t actually until like the next month after that that Ricardo Spawgni or Spagni, I don’t know how you say his name, who’s kind of credited as the founder or at least the visionary behind Monero, joined the project. So it’s not like this is actually like a unique project from Ricardos Bagnan it’s something that he picked up on really early and became the leader of. That was something I didn’t know.

Jay Kang: I have a question for you then. Monero is important because it’s an anonymous client right?

Aaron Lammer: That is definitely like the first thing you’re going to hear about it.

Jay Kang: So you and I both own some Monero right.

Aaron Lammer: Yes I have at certain times owned quite a bit of Monero.

Jay Kang: Yes. So if I go on the exchange in which I have this Monero and I see that I have like X number of Monero. How is that anonymous?

Aaron Lammer: Okay so anonymity, we talked a little bit with Adrian about the ways in which Bitcoin is not anonymous. And I think that that’s easy, like that’s a little hard for people to wrap their head around in practice. But let me give an example. Let’s say me and you had a debt. Right. And you’re like Aaron you owe me point 1 Bitcoin, and I was like that is correct Jay. We made a bet and I owe you point 1 Bitcoin, I’ll pay you, what’s your Bitcoin address. What’s your wallet. Give me your address I send you point 1 Bitcoin.

Aaron Lammer: Now if that was a Coinbase to Coinbase interaction, you’d be reasonably shielded but let’s say I sent it from my hardware wallet to your hardware wallet. I now know the address of your hardware wallet and I potentially can go onto the block chain ledger for Bitcoin and peer into how many Bitcoin you have in that wallet forever. I will forever know, it’s like you gave me your phone number and I’m just allowed to like read your phone forever. So the ways in which Monero differs from that. First of all every coin is fungible, which means each coin is completely interchangeable with every other coin. With something like Bitcoin, let’s say there is a massive theft of Bitcoin, a million Bitcoin were somehow stolen from an exchange, you could actually like wall those off and say those are stolen Bitcoin and they are deactivated or blacklisted forever. Monero doesn’t have that quality. Monero ,each coin is the same as any other coin, which means that the path a coin takes can’t be used to trace the people in their wallets who have interacted with that coin.

Jay Kang: Okay so fungibility seems, like I understand that concept because just like cash is fungible, the anonymity and un-traceability seems very, very sort of predicated on fungibility because you need to be able to move it without giving away information. And so like a unit can’t have like tracers on it.

Aaron Lammer: You can’t put a unique ID that’s on like the 20 dollar bill because then all you have to know is where that unique idea has been seen and you’ll know who’s had it and how much they’ve had of it etc..

Aaron Lammer: So the secondary level at which it’s confidential is called Ring signatures and Ring signatures I think, a lot of the things that are going to be true of ZCash and Monero I think are going to have, there’s going to be a lot of similarities. This is a big difference between them. So basically when you do ascend with Monero the address you’re sending it to gets mixed in with a bunch of other addresses and no one will ever know which one of those addresses actually received the transaction.

Jay Kang: So there is a big mixer.

Aaron Lammer: Yeah, it’s a big mixer. But beyond even there being a big mixer, the very nature of wallet addresses and Monero are called stealth addresses. So they’re like, sort of like when you have a URL and you shorten it, the shortened Twitter address, that’s just a random address that Twitter did. You don’t actually know what the full address is unless you have the decoder so you never actually see the Monero address, you see a weird jump link to a Monero address, which means that no one is ever aware of who they’ve done business with. Both sides are blind forever and they actually added an even deeper level, which are called Ring confidential transactions, which in addition to obscuring where it’s going, obscures the amount. So if me and you did a giant transaction, you could never be like okay it was in February 2018, let’s look on the Monero block chain, who did a giant transaction on this day at this time and figure it out. Every single piece of it is obscured.

Jay Kang: Okay so then the basic question then, how do I send you Monero then? Because I know how to send you Monero through an exchange but if I wanted to send you Monero because I wanted to buy a fake passport from you, clearly we probably wouldn’t do that through an exchange because it can probably be traced on an exchange. How do I send you Monero?

Aaron Lammer: So I actually did this because-

Jay Kang: Because you needed to get out of the country.

Aaron Lammer: Well, I did a portion of that. So I sent my Monero from the exchange to a web wallet called My Monero wallet, which is made by the makers of Monero. It’s also developed by Riccardo Spagni which ironically actually, like I had a problem with it and sent a support request and I just got us an email back from Ricardo Spagni which gave me good faith in the project that like-

Jay Kang: Really.

Aaron Lammer: There’s like not-[crosstalk 00:19:09]

Jay Kang: Why would that give you good faith in the project though, I would feel differently. It’s kind of like, you know how in movies where there’s a child who’s trying to start his own business and then he picks up the phone and pretends to be the secretary. Like Ricardo Spagni can’t even do that, he’s like, oh I actually don’t have a secretary-

Aaron Lammer: It was a mixed message. But at least he’s like really involved.

Jay Kang: Yeah.

Aaron Lammer: One of the other unique parts of that is that he’s in South Africa, which also is just an interesting and unusual place to be developing something like this. I don’t what led him on this path, I think he also works for like a Crypto payments company or started one. But basically what happens is and this is even true if you’re making a transaction with yourself if you’re sending it from one of your wants to another, you make a command in the wallet that’s receive Monero and then that generates an address, you send that address to someone else, they do a send to that address, that addresses is like a one time cipher that has basically been destroyed.

Jay Kang: So it is the same mechanism as sending Bitcoin?

Aaron Lammer: Yes except in Bitcoin you’re sending your wallet address. This time you’re generating like a one time code.

Jay Kang: But there’s like a one to one [crosstalk 00:20:21]

Aaron Lammer: Yeah, there’s a one to one.

Jay Kang: Okay.

Aaron Lammer: There’s a one to one but it’s a moving target. Basically nothing ever gets used again. So moving on to what I think Monero is better known for. There was a big dark net market bust in the last week or two for not actually Alfabay but Infraud. This is not the one we were talking about with Adrian which is Alfabay, which was the predecessor, though a successor to Silkroad, Infraud was run by a Russian guy named Sergei Medvedev. And he was caught in Thailand. Seems like if you were on a dark net market you got to live in Thailand.

Jay Kang: But you also get caught in Thailand.

Aaron Lammer: I know. Yeah, yeah.

Jay Kang: Maybe Thailand is not as secure for dark net markets as people seem to think since it seems like every, like this guy was, it’s not even like he lived in Thailand. He was like on vacation in Thailand.

Aaron Lammer: I think he had fled to Thailand. I think he had fled from Russia to Thailand. Infraud I think was less of a drug market place and more of like a-

Jay Kang: They sell like credit card numbers.

Aaron Lammer: Sell credit card skimmers, credit card numbers. It was basically like a lot of like tools for crime and the proceeds of crime moving hands. So this was surprising to me. And I think maybe to you too, he was caught with 100000 Bitcoins.

Jay Kang: Yeah. That blew my mind.

Aaron Lammer: That’s a lot of Bitcoin.

Jay Kang: So much Bitcoin, I mean that is what, I mean even within, if you just think of it as a hypothetical limit of Bitcoin, I mean 100000 into 21 million is a large percentage of all the bitcoin.

Aaron Lammer: Like I think there’s only like 14 or 15 million unless we’ve burnt all the coins.

Jay Kang: It’s like one one fortieth.

Aaron Lammer: Yeah I mean we’re talking about someone who may have controlled a half of one percent to even one percent of the world’s liquid Bitcoin. And this is a guy running a single dark market site. So one of the things that I learned about Monero and the way it’s used criminally is, I think most people think that Monero is used for the transaction, to buy the stuff, sell the stuff. It’s also used as a way to hide Bitcoin proceeds. So a lot of the payouts on these like extortion online kind of frauds is actually in Bitcoin and then people will use shape shift and Changily to exchange that Bitcoin for Monero, which is then untraceable.

Jay Kang: So Shapeshift being like another mixer?

Aaron Lammer: More or less yeah. So Shapeshift and Changily are places where if you don’t want to go on an exchange, you can basically just send them one currency, they send you back another currency at more or less market rate, you probably don’t get quite as good a rate as you would in exchange but it’s basically like going to a money changer at the airport rather than going on some sort of a larger currency exchange. So I’m surprised he had 100000 Bitcoin, in the case of Alexander Cazares who was the guy who ran Alfabay when he was caught, they assumed that the bulk of his wealth was in Monero but that they would never be able to figure out how much there was. And I guess this could be true here. This guy may have a dead Monero wallet with even more than 100000 Bitcoin worth of Monero.

Jay Kang: Yeah well look I mean that was what caught my eye about this story was that I mean 100000 Bitcoin is insane. He could’ve bought like a NBA team a few years ago.

Aaron Lammer: I mean do we know what percentage of the Bitcoin and these other currencies in the world are held basically like in criminal systems.

Jay Kang: Well look that’s something that the CFTC is definitely looking into right now. That always is the real question that people have, which is just like where is all this stuff. And who is using it and the people who are dismissive like Nouriel Roubini or any other sort of hell bent critics of Bitcoin. They will tell you that it’s all fraud and then people are like, it’s not all fraud, there are people who are making remittance payments across. But then you hear a story like this and you’re like OK, look clearly some people are using this for fraud and illegal activities.

Aaron Lammer: I feel like those issues get confused with each other. So there’s like fraud, like the way ICOs are often fraudulent-

Jay Kang: No, no ,no, no, yeah I agree.

Aaron Lammer: Which are inter-crypto scams. And then there’s true external to crypto criminal activity that is using crypto coins as its primary money. And I think we hear a lot about frauds within crypto but literally this mafia like controlled by literal international criminal masterminds, we don’t really know when people talk about that, is that one, a few percent cent of the Bitcoin out there. Or is that like more than 50 percent. It might be like these guys might have most of the Bitcoin right as this point.

Jay Kang: They really might.

Aaron Lammer: People who are really early have a lot of Bitcoin. Roger Vair had 300000 Bitcoin.

Jay Kang: The pie chart would be incredible to look at I think. It would be like well here’s the [inaudible 00:25:19]. And then here is a guy who did Infraud and then here’s how much every other dark net market is. And then here’s Roger Vair. And here is everybody else and it’s like a tiny sliver. It could be, I mean at this point we don’t really know those sorts of volume things even though I’m sure that some sort of audit could be done given the transparency of the block chain. But yeah it’s the 100000 number just blew me away.

Aaron Lammer: Yeah it’s a fascinating angle that I feel like is under reported because people want to report so much within crypto but this stuff may dwarf all of these like exchange hacks in its scale.

Jay Kang: It’s a billion dollars am I wrong?

Aaron Lammer: Yeah.

Jay Kang: Like if Bitcoin is 10000, it’s a billion dollars.

Aaron Lammer: Yeah it just passed a billion dollars.

Jay Kang: He had a billion dollars in Bitcoin.

Aaron Lammer: At one point, hey if he was [inaudible 00:26:07] through the rise, at one point he had like one point eight billion dollars and then he went to jail.

Jay Kang: So I have a question about that. What happens to that hundred thousand Bitcoin?

Aaron Lammer: I believe that now governments are just auctioning them off and Romania, so at one point Romania, as people who are interested in fraud and scams, which I am, I find those stories of fraud and scams irresistible. There are so many scammers in Romania and they had caught so many that the government had been seizing Bitcoin and didn’t really know what to do with it. They they had basically been doing it over time because again who was early to Bitcoin, fraudsters and scammers, when they finally tabulated how much Bitcoin they had and discussed bringing it to market and they I think are doing an auction because that’s the only way you can sell these huge chunks is basically in an auction, it was one quarter of their national debt. They have enough Bitcoin to pay off a quarter of their national debt.

Jay Kang: Oh my God. Well look, civil forfeiture is obviously a big problem here in this country and I do wonder if going to be some enterprising Attorneys General or you know law enforcement people who are going to start targeting crypto people. You can just seize it.

Aaron Lammer: That’s a really fascinating difference between Bitcoin and Monero. So Bitcoin you can get involved in some criminal shit, with Bitcoin it gets seized by the government and then it gets pushed right back into the market. Monero, if you’re a dead wallet with Monero and you just let it die, it’s absolutely un-seizable. No one can ever get them that Monero without the private keys. Which means that when guys like Medvedev and Alexander Cuzeris, these dark market guys who may have had more than 100000 Bitcoin worth of Monero, that Monero is burnt forever and there’s only 21 million Monero coins, just like there’s 21 million Bitcoins, which I just think is a very smart and reasonable thing to do. Like if there’s already like a peg that people understand just make it the same number of coins. But Monero may be dying out. The coins may be getting burnt forever faster than Bitcoin even.

Jay Kang: It’s true. OK so I have a question then. Let’s say that, you know Ricardo Spagni me and the Monero people, if you ask them in an interview, does your thing exist to abet criminal activity. Of course they’ll say no. You are very bullish on Monero, you have been for like months and you talk about you buy Monero derivatives like Sumo coin.

Aaron Lammer: How dare you? They’re equal citizens.

Jay Kang: Are you-

Aaron Lammer: A Sumo lord is every bit equal Monero lord.

Jay Kang: Are you doing this because you think that the real test case or the real use of cryptocurrency is criminal behavior and criminal activity and that if you are going to put your eggs in a basket you should put it in a criminal behavior, criminal activity basket.

Aaron Lammer: I feel like that question was entrapment.

Jay Kang: You sound like one of these Jordan Peterson fucking acolytes who have been coming at me on Twitter for five days, where they’re like, you trapped him, that’s an unfair question. No it’s a totally fair question.

Aaron Lammer: There’s two major ways I feel about it and the first one is stronger and is not inherently tied to criminality, which is Bitcoin’s the leader. If one of these project is going to be the best investment of all the alt-coins, it’s going to be the one that has the greatest chance to compete with bitcoin. And I think the two coins that to me honestly can make that claim are Monero and, let’s not just say Monero, privacy coins and Ethereum because they both present a full vision of the future and Ethereum is a really different vision than Bitcoin but there is a different path that could be taken, which is Bitcoin was used on the Silk Road, like that’s where Bitcoin came from. We just had Adrian Chan on and that’s its origin story. So it would make sense to me that whatever is being used on dark net markets now has a chance to be competitive with Bitcoin in the future.

Jay Kang: I don’t quite believe your answer because I think you just wanted to say yes.

Aaron Lammer: That was, number two is I do think a huge market is money laundering and applications that require privacy. Now you can say most of those are money laundering. I don’t really know. Like I don’t know what all the applications that require privacy, I know that I would prefer if I was dealing in any volume in almost anything to have my transactions be private. They seem more valuable. And I also think, like what do they say, like money laundering is worth 30 percent of the money. If people are moving Monero all over the world I think that makes it a good investment.

Jay Kang: Yeah look, if they make, and I was thinking about this yesterday, is that if somebody released, and I mean obviously they can’t do this but if they release an ETF that was drawing from every single type of money laundering, whether like 115 million dollar apartments in New York City to crypto currencies to you know like high end art. I would put so much of my money into the-

Aaron Lammer: Beijing real estate.

Jay Kang: Into the money laundering ETF.

Aaron Lammer: Or Hong Kong rather. Yeah, yeah absolutely. That’s an interesting idea, like people would say it’s unethical to speculate on Monero if you think that it’s like a criminal like-

Jay Kang: I would not say that.

Aaron Lammer: I know you wouldn’t. I know that you find no form of speculation unethical.

Jay Kang: Yeah, exactly.

Aaron Lammer: But I don’t think many people would say that like making gains on a Manhattan condo because the market is propped up by like foreign money laundering money is unethical.

Jay Kang: I think a lot of people would say that but I think that they have almost no power to stop it. Because the government, the city government as well as the U.S. federal government at this point, they’re fine with it.

Aaron Lammer: I just don’t hear anyone saying, no I don’t want to move to New York, New York City real estate has like a bunch of ties to like money laundering interests.

Jay Kang: Well sure. But I do think that people would say like we should not support like turning of the Plaza Hotel into condos that are only bought by Russian oligarchs and Saudi princes.

Aaron Lammer: I agree with that. I agree with that.

Jay Kang: Okay, is there anything else about Monero?

Aaron Lammer: One more thing. Monero means coin in Esperanto.

Jay Kang: That’s what I thought I was like is that an Esperanto word.

Aaron Lammer: No wonder I gravitate toward it. I always love Esperanto words.

Jay Kang: That’s like the closest that you’re going to come to the dark web yourself, is your love of Esperanto. All right. So we both had assignments for this. So I am going to tell you about ZCash. It’s hard for me to say but I think that if you were going to say what are the two privacy coins with the best reputations, everyone would say ZCash and Monero.

Aaron Lammer: Yeah and I think that if you were going to overall poll people I think ZCash has a more reputable reputation. It gets invited to conferences that Monero, as the shady step cousin of-

Jay Kang: Yeah I think that ZCash is kind of like the Harvard graduate whereas Monero is a brilliant guy but he might be at Suffix state or something like that doesn’t go to class.

Aaron Lammer: Yeah, it’s like someone who’s like a brilliant cryptographer who has like a few felony convictions from his early 20s on his record.

Jay Kang: So the most appealing thing and I think the reason why is ZCash is invited to conferences and the reason why it gets its foot in a lot of doors is because of the team. Now ZCash like almost all other crypto projects is open source. There’s no centralized control but the people who are on the team are very very impressive in ways that are really easily understandable by your lay person. So the head of it is Zooko Wilcox, who tweets all day and who is very sort of influential in the crypto space. He worked on Digi cash, a bunch of other stuff. They also have people like Matt Green who is a cryptology expert-

Aaron Lammer: He’s a Johns Hopkins

Jay Kang: Who works at John Hopkins. Yeah, John Hopkins.

Aaron Lammer: Hey follow him, he’s a good Twitter crypto contact.

Jay Kang: Yeah, he’s great. I’ve actually interviewed him once.

Aaron Lammer: Oh you have, we should have him on the show.

Jay Kang: He was a really smart guy. Christina Garmon who is also at Johns Hopkins. A guy named Alessandro Ciesa at UC Berkeley, almost everyone there went to some top university, is either a professor at a top university.

Aaron Lammer: Didn’t Snowden tweet like if you want real like privacy use academic cryptography or something?

Jay Kang: Yeah, so like ZK Snarks. Yeah he was talking about ZK Snarks. And so if you to say that there is a, this idea that, this is something that Jamieson Mopp told us, that he looks at the team and do the people who are making the team, can you sort of infer that they are making a good faith effort at making a real project that is not just a cut and paste job of some other crypto currency that they’re using to pump and dump, like is this a real project or not.

Jay Kang: And with ZCash, I think more than any other cryptocurrency, perhaps even more than Bitcoin, you can sort of say that. You know like these people are very smart people, they’re people who probably do not care that much about money because they’re not scammers.

Aaron Lammer: I mean whether they care about money or not. If you have a Ph.D., you clearly at least are like in it for the long con.

Jay Kang: Yeah exactly and they’re not going to pump and dump their own coin, sell the top and then move on to another pump and dump scam, like that’s not who these people are and so that I think is why it has such a good reputation. It has a bit of an interesting history in that it started as the Zero Coin project, which is still something that you can invest in, but it was supposed to be a way to mix your Bitcoin on the original Bitcoin block chain. And so it wasn’t supposed to be an actual alt-coin.

Aaron Lammer: Which echoes a bit what we said., what we were talking about with Monero as a place to dump stolen Bitcoin, which is these anonymized coins you can dump into them and then dump back to Bitcoin and you’ve more or less obscured the entire path.

Jay Kang: Yeah so ZCash I think, it’s interesting because they decided, they got a lot of flack I think when they decided to make their own cryptocurrency and not just use the ZCoin which was like you know something that was supposed be used on the Bitcoin block chain because they reserve, like a lot of these ICOs do, they reserved a lot of it at some percentage for the founders. So it wasn’t like Monero was it wasn’t just this thing that was going to be mined in that it was completely open and democratic. And so people from the beginning were sort of out against Zooko and some of the other people because they were saying like, look you’ve reserved way too much for yourself. Their retort to that is essentially what other people say and what you know is true in like the he pharmaceutical business for example, which is that like we have to have a way to pay for all these people’s time. These aren’t like you know charlatans who are running around, they’re P.H.D’s, they’re people with a lot of expertise and we need a way for initial investors and them to be reimbursed [crosstalk 00:37:16].

Aaron Lammer: This is not like foreign to the startup world in people have figured out ways to incentivize people to work in the long term through like vesting schedules. It’s not like you could take the 20 percent share and just take it straight to Maui which you could on some of these ICOs.

Jay Kang: Sure, but you know, to be fair to the people who are critical of it, if you are talking about something that is totally anonymous, that is democratic-

Aaron Lammer: I see where you’re going with this.

Jay Kang: This certainly is something that will give you pause. It doesn’t have the anarchic promise that Bitcoin had at the very beginning. And I think that’s why people are upset about it. So it also is a completely anonymous transaction sort of. And this is part of the reason why-

Aaron Lammer: People have poked a few holes in their anonymity and there’s a lot of like if you look at like Ricardo Spagni, who runs Monero and Zooko who runs ZCash, there’s a lot of sniping back and forth.

Jay Kang: Yeah, they don’t like each other.

Aaron Lammer: Who’s got the better anonymity plan.

Jay Kang: It’s like Katy Perry and Taylor Swift or something like that. Everything they tweet is kind of about the other-

Aaron Lammer: You’re definitely the first person to make that comparison.

Jay Kang: So let me tell you how it works which, once again we are going to very strongly say that neither Aaron or I are experts in this so if we get anything wrong then please tell us.

Aaron Lammer: You can just generally assume the show is neither financial advice nor software development advice.

Jay Kang: Nor factual. All right. So it also uses sort of a mixer idea. So you are sending a coin from one person into another person and it goes through this elaborate process. And on the other end it goes from me to you but nobody can see what happened in the middle and that is not true of Bitcoin because you have confirmations that are on the block chain that are public. You can see where the Bitcoin went. It’s not true with ZCash. So the thing that is used is this thing called the ZKsnark which stands for zero knowledge, succinct non interactive argument of knowledge.

Aaron Lammer: It’s a great name for like an indie rock band also.

Jay Kang: Yeah it also sounds vaguely authoritarian and out of George Orwell.

Aaron Lammer: I never noticed this before but Zooko is z-k. Is he named after that? Did he change his name to be like that? Or did he name it after himself?

Jay Kang: I don’t think so, I think his name is Zooko. But I think ZKSnarks, zero knowledge, I have no idea. It might be that he was like one night high and pondering the letters of his name and he said ZK also could stand for zero knowledge.

Aaron Lammer: Aaron Lammer, absolute logic.

Jay Kang: It’s fascinating to see you slowly get red-pilled on this show Aaron, absolute logic.

Aaron Lammer: The red pill. Basically, in the blue pill example I just eat buff pills and see what happens.

Jay Kang: Alright so, these snarks, or ZKSnarks are how these transactions are done, there’s sort of a layer on top of it and it’s very, very complicated and it’s based on sort of algebraic math but the essential thing that you just need to know is that what you’re doing is that one side is positing something that they know about the other side but neither side knows what that thing is.

Aaron Lammer: It’s like if you’re going to like have like a secret meet up like with like a spy contact and it’s like, OK we’re both going to say like Partridge.

Jay Kang: Oh yes that is true but you don’t even know that the word is Partridge.

Aaron Lammer: Right, right, right. We don’t know what the word is of the other person but they’re going to form like a key that matches, links into each other.

Jay Kang: Some intermediary will hear from both of you that you said Partridge but neither of you will know that Partridge is the word.

Aaron Lammer: We’ll both say like half a sentence in a language that we don’t know but someone who knows that language will say those two paths of a sentence will make one full sentence.

Jay Kang: Exactly or they’ll give you a document of 500 words. You have no idea what that word is and they’ll give someone else a document with 500 words. And they’ll have no idea what the word is. But if the word is said by both then the transaction goes through. Nobody knows anything about it. That actually is sort of the general idea of it I think.

Aaron Lammer: So those ZKSnarks, just to recap and tell me if I’m wrong. ZKSnarks are to ZCash, what ring signatures are to Monero.

Jay Kang: Yes.

Aaron Lammer: These are like, they’re defining, there’s a bunch of similarities. They’re both fungible. The defining difference between them is how they approach that anonymity and how they make that secret one time linkage.

Jay Kang: Yes. And so here are some problems with ZCash and I think this is part of the reason why I think they’re both beloved within the crypto community because the people who are doing it are very smart and reputable. They make crypto good but also why people have a lot of skepticism towards it, which is that you don’t have to use the ZKSnarks transaction, if you do it’s called a shielded transaction.

Aaron Lammer: And that’s true in Monero also, the shielding, the anonymity is opt in or opt out. I can just give you my real address, I just can also choose to give you a phony address basically.

Jay Kang: So, ZCash coins are either in a transparent pool or a shielded pool essentially. It’s either that the blinds are up or the blinds are down. As of December of 2017, according to something I read, only around 4 percent of ZCash coins were in the shielded pool. So that means you know yet the vast, vast majority are just out there and you can find them. Like you and I have both owned ZCash. What we own were unshielded coins, it’s the same as owning Bitcoin in the sense that they’re traceable.

Aaron Lammer: It’s almost a little bit like, oh yeah we all can anonymize our web traffic with VPNs. But realistically most people just won’t use the VPN. And like these coins are just traffic, I mean even though that’s their intended use and what makes them unique, most people still, like if I was just sending you Monero, why do I need to shield that.

Jay Kang: Yeah, that’s thing. If most of it is just done for store value and it’s not done to actually make an anonymous transaction then there’s no reason to go through the shielded transaction. So like for example if you told me, Hey do you want to buy some of my ZCash. And I was like sure and I like brought some cash to you and you just sent it to me through the exchange or through any any sort of transfer system then we wouldn’t bother shielding it because who cares.

Aaron Lammer: But even if you don’t shield the transaction in both the case of ZCash and Monero, you can’t peer into the wallet. So just even though I know your phone number now it doesn’t mean I can just read everything you’ve ever done. I mean that is still a difference like it’s more shielded just by its general nature even if you do it with your hands up.

Jay Kang: So like the math behind all this and comparing Ring signatures to ZKSnarks I think is well beyond our comprehension. I tried to read it and was like I like my eyes-

Aaron Lammer: I will say one other thing that I didn’t know, I know that ZCash is always considered the academic coin but Monero is actually, like the whole idea of ring signatures is from a 2001 MIT paper so all of this stuff originally came from academic cryptography.

Jay Kang: Yep. And so I think that the sort of case for ZCash is not current because the fact that 96 percent of the coins are not shielded means that no one’s using it, I’ve yet to see a drug baron or you know or a credit card fraudster getting caught with a ton of cash and it-

Aaron Lammer: And I’ll say that for me with Monero, I wasn’t totally clear when I made that how I was supposed to shield or not shield my transaction. It’s not easy.

Jay Kang: Yeah and it’s difficult. It’s not easy and also with ZCash most places don’t actually have the shielded wallet so you have to kind of look for them, which is also difficult. At that point you might as well just use any other number of ways of sending money illegally, which like including like just dumping suitcases full of cash somewhere. But I think the reason why people are excited about it is because it launched to such fanfare and because of the strength of the team. They believe that if these people, smart people all work together that they’ll come up with something good. So the use cases down the line but the price is always pretty high. And so I don’t know, I think that Monero is definitely being used a little bit more than ZCash but I think that ZCash in that way is a little bit more speculative of a bet at this point, saying that at some point it will be the king privacy coin because the people working on it are very smart. Is that influential to your thinking at all?

Aaron Lammer: It is. I mean look the thing I believe in the most in crypto currency is store value. That is the use case I truly believe in. There’s other use cases like Ethereum pony universe that I’m like that’s fun to talk about, maybe. But I really believe like right now ,right here in store value use cases for crypto currencies and I think privacy coins have the best case to make for store value. I think there’s a bunch of evidence for a really big difference. I was mistaken about this. I actually thought that ZCash had a smaller total supply than Monero and that’s not true. They’re both 21 million coins, which makes me think they both have integrity but there’s currently 15 million Monero out there whereas ZCash has a very slow trickle. There’s only three point two million ZCash currently on the market.

Jay Kang: It’s a very slow release.

Aaron Lammer: Yeah and that makes for at least like present day store value kind of usage. It’s already trading for like a little under five hundred dollars, you could see it going really high there’s not very many of them. And they’re both minable more or less by like you know if you go on like Craigslist and you look at the mining rigs for sale. People always say like ZCash miner, Monero miner, the whole system is up and running the way it is with Bitcoin.

Jay Kang: Yeah I agree but I am worried about the fact that at some point you’re going to have like a sort of first in advantage. And I do think that the fact that people are not using ZCash but are using Monero that does concern me. If both work you know one is theoretically and scientifically and technologically superior to the other but they both work. You know I don’t quite see why there would be a massive shift if one of them already has like a huge first mover advantage over the other one.

Aaron Lammer: I don’t know. I mean I don’t know how much of the first mover advantage it has, I agree with you it does anecdotally seem like a lot more. But what’s interesting to me about store of value privacy type coins is the forks and clones have been really popular of them, like Z classic was trading for like ridiculously like high close price. And normally when people are like oh it’s a fork, like it’s Bitcoin platinum, I’m like well who cares. Like Bitcoin platinum is not going to survive or endure but if there’s actually like a real practical use case like something like Monero and you’re actually using it to do like a hidden transaction for a criminal act or whatever you want to do that hidden transaction and in some ways like a Monero clone is just as good as real Monero. Like sumo coin, which I have shilled hard on this show, is a Monero clone.

Aaron Lammer: There’s a ton of ZKSnarks coins out there that are basically doing variants on what ZCash is doing. You’ve had a few of them haven’t you? You’ve dabbled in those realms.

Jay Kang: Yeah, yeah. During my short Cryptopia days before I was kicked off the-

Aaron Lammer: Zcash was a zero coin.

Jay Kang: Yeah, well zero coin is a little bit, zero coin is the original ZCash.

Aaron Lammer: Okay. Isn’t there another one that’s also like a fork. They’ve all got zees. Anything that, oh Zoin.. I was accusing you of the acts that I had commited.

Jay Kang: Yeah, exactly. I was like what are you talking, I think you’re talking about yourself here.

Aaron Lammer: I seem to remember a ZCoin from Cryptopia. Well how do you feel about investing in the long term? Why are you holding them? Either Monero or ZCash.

Jay Kang: I mean I’m not but I was for a very long period of time and for reasons similar to you that I could see that they would be using money laundering and I think money laundering is a sort of stable business. And that that if things are actually being used and that’s kind of interesting to me as well because you know ninety seven percent of coins are never used. So the reason why I think I got out, well look there’s a lot of market reasons that are less interesting you know based on just the fact that it’s easier just to have Bitcoin. Especially during these times when it just seems like a safer bet.

Aaron Lammer: It’s true if you’re gambling on stable coins, like you’re not gambling on quick profits either way.

Jay Kang: Yeah I do think that the thing that I would say is that, until there is economies that are not all dark net markets where these things need to be used, I have a hard time believing that they are going to expand beyond that. So like a lot of Zooko job it seems like you know or the ZCash groups job is to go around to regulators, go around to law enforcement and go around to politicians and convince them that this whole project is not just done to fund the legal markets. And so they are basically going around and saying like look it’s good for things to be fungible, it’s good for things to be anonymized, there are a lot of other applications for that. But then when you read what they’re actually saying like there’s no solid examples.

Aaron Lammer: All right. I want to push back slightly on that idea. I think that’s kind of the like guilty until proven innocent kind of view of them, we don’t really know-

Jay Kang: But look these things are being used for-

Aaron Lammer: But we don’t know what percentage, like we don’t know. I mean that’s like the nature of the coins is that we don’t know.

Jay Kang: Yeah, I agree with that. I don’t think that they’re making these things to, I don’t think that Zooko and Matt Greene are sitting around being like how can we help fund the illegal passport business. But I do think that there needs to be at least, or at least I just want to hear one reason why you would use this instead of cash or why you would use this instead of Bitcoin. You know if it’s not to just make an a legal transaction, that’s it.

Aaron Lammer: The reason why I continue to be bullish about them and continue to think that they’re much more than that is that I don’t think that just because you desire privacy you’re inherently doing something bad. I think that like that desire to a right of privacy, which is very central to the Bitcoinian world view.

Jay Kang: Bitcoinian.

Aaron Lammer: If the world that people are describing with Bitcoin comes true, I think people are going to want privacy. If you could just like freely give me privacy on Bitcoin, I would take it. And that makes me think that they have a unique and compelling feature that Bitcoin doesn’t have, which I really can’t say about 90 percent of the alts that I’ve ever had in my bag. And that’s sort of the final question here, is if these features do prove useful whether they’re in dark net marketplaces or for average consumers, will we see Bitcoin adding them in through some sort of an additional layer.

Jay Kang: That’s the thing I don’t quite get, which is ZCash started as a way to modify Bitcoin.

Aaron Lammer: Yep, a middleman, a jump step.

Jay Kang: And I don’t kind of get why they need another step to it, why not just convince Bitcoin core and other developers to start adding in privacy.

Aaron Lammer: Well that’s it.

Jay Kang: Because if all it is is a mixer that you’re putting in the middle essentially, it’s possible to add that to Bitcoin. And I think that you know one of the people that we look to for smart thoughts on this, Haralabos Voulgaris, he at some point was tweeting about that. He was like, I believe in Monero, I believe in privacy coins but I also believe there will be a day where Bitcoin will just add these things onto it.

Aaron Lammer: I think I agree with him there. But I think Monero will continue to appreciate until that point, which is to say what would cause Bitcoin to think that was important would be the rise of currencies like Monero and Z cash.

Jay Kang: Yeah but then you’re basically betting on you know like, it’s like if somebody doesn’t have proprietary rights over like a technology and other people are just too lazy to just do it themselves like you’re kind of betting on that, you know.

Aaron Lammer: It’s also like a little unclear what that even means that Bitcoin would add it, that could be a fork of Bitcoin, that could be like a lightning network style like second layer solution. I think that’s what most people are thinking when-

Jay Kang: Yeah, that there will be like a button that you can press to be like make this one private.

Aaron Lammer: Which is kind of how ZCash and Monero work already. It would just be not part of the initial code base. It would be like part of something that was built on top of it. I can see a bunch of different outcomes, if the outcome is like oh it’s dumb to invest in Monero because like Bitcoin is going to like make itself Monero. I’m like, that sounds like a very good bet to me. Something that is that vital seems like a good bet.

Jay Kang: Oh yeah, cool.

Aaron Lammer: All right well so have we talked you into buying any ZCash or Monero are you staying out of the game?

Jay Kang: No, I’m staying out.

Aaron Lammer: Okay.

Jay Kang: I basically have not touched any of the alternate exchanges in a month or two.

Aaron Lammer: I feel like it’s a little premature now because we’re in a spike but let’s next time, let’s check in on our bags, their resuscitation.

Jay Kang: I still have Storm because I’m too lazy to sell it.

Aaron Lammer: We’ll be checking back in on that and if you have questions about Monero or ZCash or any of these privacy coins that I can’t remember the name of-

Jay Kang: Zoin.

Aaron Lammer: Zin. Send them to our mailbag. Hi@cointalk.show. Maybe we should just start reading a few mailbag questions in every show rather waiting.

Jay Kang: Sure, yeah we have a few.

Aaron Lammer: Okay. here’s none in this episode but we’ll be starting to answer some mail. So if you have questions about stuff we’ve talked about that’s great because then we could talk about it again.

Jay Kang: Great.

Aaron Lammer: All right.

Robot: This episode was taped Thursday February 15 at 2:00 p.m. Eastern Standard Time. The Bitcoin Price Index was $10,085.

Coin Talk

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Coin Talk

The official podcast of Bitcoin crashes. Hosted by @aaronlammer and @jaycaspiankang. Mailbag/contact: hi@cointalk.show


Come ride the crypto rollercoaster with hosts Aaron Lammer and Jay Kang (and guests) as they laugh their way through the week in Bitcoin and beyond.

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