FUNDAMENTAL REPORT: BITCOIN PRIVATE AND THE VALUE OF PRIVACY ON THE BLOCKCHAIN

in #bitcoin4 years ago (edited)

The following report delivers a brief but comprehensive overview of the Bitcoin Private hard fork. It covers a high level insight into: the privacy technology behind it, the details of how it came to fruition, Bitcoin hard forking philosophy and fundamental price comparison against privacy cryptocurrencies and major Bitcoin hard forks. The headings of each section are listed below allowing the reader to navigate to any section that piques interest. However, it is advised to read the entire report to avoid misconstruction.

All data provided is correct as of 4PM GMT March 14, 2018.

  • INTRODUCTION (I)
  • INTRODUCING PRIVACY ON THE BLOCKCHAIN (II)
  • ZERO-KNOWLEDGE PROOFS (III)
  • ENCRYPTING THE BLOCKCHAIN WITH ZK-SNARKS (IV)
  • CHAIN SPLIT (V)
  • THE FORK IN THE ROOM (VI)
  • PRICING BITCOIN PRIVATE IN THE MID TO LONG-TERM (VII)
  • GOVERNANCE (VIII)
  • FUTURE (IX)
  • CONCLUSION (X)

I. INTRODUCTION

Many have prophesied the larger adoption of privacy technology on the blockchain after the perceived anonymity of the Bitcoin blockchain has been debunked; none more so than blockchain analysis firms such as Bitfury, Chainalysis and Skry who have been aiding government bodies in identifying Bitcoin users. This perception has stemmed from the ability to send and receive bitcoins without having to hand over personal information. However, obtaining reasonable anonymity with Bitcoin can be quite complex with perfect anonymity quite possibly out of reach – especially when exchanging it to fiat currency for cashing out or making online purchases.

Bitcoin's ledger is public, functioning as a necessity to verify correctness of transactions on its blockchain, permitting anyone to view any transaction at any time. Every transaction on the blockchain is stored forever, hence it can be relatively simple to trace the path of bitcoins from one address to another, i.e. the transactions are linkable. As a result, Bitcoin is better described as pseudonymous: the act of having or using a false or assumed name. In this case, the pseudonyms are the digital addresses to which bitcoins are sent from or received. If an address is compromised and linked to a real-world identity, then all transactions conducted under that address can be linked to that person.

With pseudonymity failing to be sufficient in removing personal identifiers to public blockchain data, market demand for privacy-centric cryptocurrencies have increased. Many confuse the terms anonymity/pseudonymity and privacy to have the same meaning; although related in scope, they have notable differences. Instead of stripping personal identifiers from public data, privacy considers the data in need of protection itself e.g. a discussion in a private meeting or more appropriately, encryption of information to make private for personal use or share with intended parties. Anonymity improves the aims of privacy, like protecting against targeted attacks on private data and conversely, protecting private data that links to personal information.

II. INTRODUCING PRIVACY ON THE BLOCKCHAIN

As this digital asset class has progressed since the inception of Bitcoin, there have been a number of alternative cryptocurrencies that have implemented techniques to their blockchains in order to achieve some level of transaction privacy e.g. Bytecoin, Monero, Dash to name a few. However, none of the techniques involve data encryption – the most effective data protection method – of transactions. Instead they use ring signatures (Bytecoin, Monero) and coin mixing (Dash) technology.

At their time of creation, the technology that could authorise blockchains to verify and validate encrypted data had not yet been designed. This was a novel concept and the constraint lay in the fact that blockchain networks would not be granted access to view the underlying data as a means to assess if a user had the rightful ownership of digital coins/assets to spend. The verification and validation of encrypted blockchain data required evolution of cryptographic methods, namely zero knowledge proofs. This is what the Zerocoin Electric Coin Company (ZECC) – or colloquially referred to as the Zcash Company – were able to accomplish when they launched their cryptocurrency Zcash (ZEC) on October 28, 2016.

III. ZERO-KNOWLEDGE PROOFS

To understand how Zcash enables privacy through encryption, it helps to gain a high-level primer of how zero knowledge proofs work. In essence, a zero-knowledge proof (ZKP) is a way of demonstrating the truth of a particular statement without exposing any information about the statement apart from the fact it is true. The problem with trying to implement ZKPs on the blockchain is that there is an element of interactivity required between the prover (person having knowledge of the statement) and the verifier (person wanting to ensure the prover does in fact have knowledge of that statement). This is best expressed through a simple example.

Say Victor is colour blind and cannot differentiate between a blue and a green pen he owns and his friend, Priya, wants to prove to Victor the pens are in fact different colours. In this scenario, Victor is the verifier and Priya is the prover. Priya can ask Victor to go into another room where she cannot see what he is doing. There, Victor can draw two lines on a piece of white paper, where he can decide to use either both pens to draw each line or the same pen to draw both lines. Victor rejoins Priya where she can assess the lines on the paper and tell Victor whether he used one or both pens. Now, even if Priya answers correctly and proves knowledge of how many pens Victor used, there still lies the possibility it could be a lucky guess as there are only two choices. 

Explaining this probabilistically would have it expressed as 1 in 2 or a 50% chance of guessing correctly, directly similar to flipping a coin to see whether it lands heads or tails. A lucky guess is not a proof of knowledge, so to ensure high probabilistic certainty, the proof must be conducted over multiple rounds. Each subsequent round, the chances of being consistently right by guessing reduces by half and after 20 rounds there is a 1 in 1,048,576 chance of successfully guessing - meaning Victor can be ~99.99%+ sure Priya has knowledge of the proof, although never reaching absolute certainty.

IV. ENCRYPTING THE BLOCKCHAIN WITH ZK-SNARKS

The sort of example explained above cannot be replicated on the blockchain as it would require verifiers to create their own randomness for provers to prove their statement - to which the statement they are attempting to prove is the ownership of a particular digital asset they can send - thus, it would be far too inefficient in processing transactions. To overcome this bottleneck, the cryptographers and engineers at Zcash developed an evolved version of this protocol called Zero-Knowledge Succinct Non-Interactive Argument of Knowledge (zk-SNARK) which eliminated the need for the interaction between verifier and prover.

To put it succinctly, a zk-SNARK is a leading edge cryptographic technique that allows for the construction of proofs where a person can prove knowledge of particular information without revealing the information itself and without any interaction between the prover and verifier. Zcash, is the first extensive use-case of zk-SNARKs. The technology grants users the option to create transactions concealing the transacting parties as well as the amount being sent; presenting possibly the most secure privacy guarantee on a blockchain.

Its blockchain offers selective transparency and complete privacy of transactions as it makes use of two different types of addresses: “t-addrs” and “z-addrs”. Both addresses share the same public blockchain but interact with it in different ways. T-addrs are known as transparent addresses, which function similarly to Bitcoin addresses, meaning they can be viewed by anyone who has access to the blockchain. Z-addrs are known as shielded addresses, where zk-SNARK technology is incorporated to conceal these addresses on the blockchain and the amount of ZEC coins being sent to or from them.

ZEC can be sent in non-mixed and mixed transactions. Non-mixed transactions involve transacting amongst identical addresses i.e. between t-addrs (transaction parties and amounts are public) and between z-addrs (transaction parties and amounts are private). In the case of mixed transactions i.e. transactions from t-addrs to z-addrs (t → z) or vice-versa (z → t), only the t-addrs and amount transacted are public.

Figure 1 Sending properties between shielded and transparent addresses.

The transaction fees for any transaction, whether it be partially shielded or private, are always visible on the blockchain.

Figure 2 Transaction between two shielded addresses where the transaction fee is visible.

Figure 3 Transaction between a transparent address and a shielded addresses where the transaction fee is visible.

V. CHAIN SPLIT

Due to the open-source nature of cryptoassets, there is nothing stopping a team of developers from seamlessly taking the code base of a particular blockchain project and adding, editing or removing any code features to produce their own blockchain. This is what is known as hard forking, a process whereby the forked blockchain is similar to the original but there are some fundamental differences to the code that make them incompatible. It should be noted that Zcash is an open-source project forked off the Bitcoin codebase, amending the code to include features that differ from Bitcoin which are displayed in Table 1.

Zcash is privately funded, an infrequent form of capital fundraising as it pertains to cryptoasset projects, compared to the otherwise common and sometimes controversial methods of: a premine, where there is no guarantee the development team will take the project seriously and protect its users or a public offering, where vast legal consideration is required.   

As a result, the Zcash team coded in an additional feature to their blockchain referred to as a Founder’s Reward. This reward is comparable to a sort of tax on the blockchain network in which 20% of mining rewards go to the stakeholders (co-founders, investors, employees and advisors) of the Zcash project whilst the remaining 80% goes to the miners for the first 4 years of blockchain operation. It is a means of compensating stakeholders who invested financially or physically to aid the creation of the project. After the 4 years are complete, 100% of the mining rewards go to the miners. In other words, 10% of the Zcash monetary base will be mined as the Founder’s Reward.

Figure 4 ZEC Founder's Reward distribution.

Figure 5 ZEC Founder's Reward distribution.

Of this 10%, 1.44% will be used for the non-profit Zcash Foundation which was created as a governance structure to support, maintain and improve the Zcash protocol, accommodating the best interests of its users.

Many were fond of Zcash but opposed the idea of the Founder's Reward; some believing all mining proceeds should go to the miners and others believing the 'tax' was too steep. Consequently, a couple of developers, one identified publicly as Rhett Creighton, decided to fork the Zcash blockchain. The fork involved nothing more than removing the section of code that included the Founder's Reward and launching November 6, 2016, a week after that of Zcash. The resulting blockchain was named Zclassic (ZCL).

Zcash updates were merged to Zclassic in parallel but project excitement and activity for Zclassic dwindled up until August 24, 2017, where it appeared to grind to a halt. This was largely due to no governance structure set up to financially incentivise and compensate the developers of Zclassic to continue supporting it. Life was kicked back into Zclassic on December 12, 2017, when Creighton announced a prospective fork of Zclassic, rebranding into "Bitcoin Private" (BTCP). After lengthy preparation, the hard fork took place March 3, 2018.

Prior to the fork, Creighton set the conditions that Bitcoin (BTC) and ZCL holders would receive BTCP at a 1:1 ratio. This is called an airdrop in which investors of a particular cryptoasset receive the coin to be distributed for free. Quite inevitably, due to ZCL being several orders of magnitude cheaper than BTC, it quickly propelled the price of ZCL in the marketplace. The time elapsed between the fork announcement and the all-time high price of ZCL saw its market value increase by roughly 9850% as per CoinMarketCap data. Appropriately, it brought scepticism towards the project.

Investing in cryptoassets is fraught with risk and the best way to measure and mitigate risk is for prospective investors to do their due diligence; monitoring process, progress and development of cryptoasset projects. Ultimately, the onus lies with the investor. Those with a position in Zclassic ahead of the fork announcement were not subject to any more risk than they initially had. Those buying after the announcement in anticipation of the fork saw it as a wealth transfer medium to a superior project.

The eventual transition from Zclassic to Bitcoin Private was a community-driven initiative, where not only was it thought of as a wealth transfer to a superior project but a community transfer too. The price appreciation brought about increased attention and volunteers to the project where it has been claimed there were over 100 contributors.

Bitcoin Private was created via an unprecedented forking method. Traditional forks normally involve two blockchains – the blockchain being forked and the resulting hard forked blockchain. In this case, the fork involved three, where the unspent transaction output (UTXO) set – i.e. the coins available to spend in digital wallets – of the Bitcoin blockchain were added to the UTXO set of the Zclassic blockchain producing the Bitcoin Private blockchain. Two-way replay protection (2WRP) was also integrated into the code to ensure protection from double spend attacks to owners of ZCL and BTC when using BTCP.

To engineer the fork a snapshot of both blockchains was taken at a predetermined time, scheduled as the first blocks mined after 5PM UTC February 28, 2018. The block height snapshot for ZCL and BTC was 272991 and 511346 respectively

The addition of the two UTXO sets of ZCL and BTC drastically accelerated inflation of BTCP. The values yielded from Table 2 show that at time of fork the initial circulating supply of Bitcoin Private was 20,304,212.5 BTCP, leaving a possible 695,787 BTCP to be mined. To compensate for the limited remaining supply of BTCP to mine and to incentivise miners to secure the network, the development team and community elected to reduce the block reward to 1.5625 BTCP per block with a block reward halving every 210,000 blocks (~1 year), making it a very low inflating cryptocurrency.

VI. THE FORK IN THE ROOM

Hard forks stem from a conflict of interest between groups who have different beliefs in regards to the way a blockchain protocol should be run or who do not agree that the protocol is being run as initially intended. The interesting characteristic of an airdropped hard forked coin is that it introduces users to new features without having to sell any of their position in their current investment or invest more money in cryptoassets.

There have been a number of dubious Bitcoin forks that also adopt the Bitcoin moniker, many of them not adding much, if any, value to the cryptoasset ecosystem. Their prices when freshly listed on exchanges appear to be strong but become largely unsustainable when speculators, traders and investors become aware of the disillusioned value. Nonetheless, out of the innumerable Bitcoin forks, there have been two – Bitcoin Cash (BCH) and Bitcoin Gold (BTG) – that have seen continued growth since their fork dates, boasting large market capitalisations of ~$17.2 billion and $1.3 billion respectively, and thus being listed amongst the top 25 cryptoassets as per market capitalisation.

Bitcoin has often been described as decentralised peer-to-peer electronic cash facilitating borderless transactions quickly and cheaply; however, large influencers within the cryptoasset space thought Bitcoin was not fulfilling the description of “quickly and cheaply”, particularly in 2017 where Bitcoin had attracted large retail interest. They believed the Bitcoin network had become slow and expensive to use due to its 1MB block size limit utilised to process transactions. As a result, they decided to hard fork off the Bitcoin blockchain to create Bitcoin Cash, keeping a number of features the same but implementing their defining factor in increasing the block size limit to 8MB, allowing its blockchain to process more transactions at a time. Bitcoin Cash has not been able to reach the same heights as Bitcoin but enough value has been created by the fork that it finds itself sitting currently at fourth in the cryptoasset market capitalisation rankings as per CoinMarketCap data.

Regarding Bitcoin Gold, their group of developers and supporters believed Bitcoin was not fulfilling the description of “decentralised”. In the early days of Bitcoin, it was possible for anyone to mine as all that was required was a home computer with a CPU (central processing unit) or GPU (graphical processing unit). But due to the huge price appreciation of Bitcoin over the years, professional mining groups emerged using expensive ASICs (application specific integrated circuits) acquiring large amounts of processing power, centralising mining operations and thus increasing the barrier to entry. Therefore, a company such as Bitmain has garnered substantial dominance in the Bitcoin economy due to the sheer amount of processing power it controls through its mining pools. Like Bitcoin Cash, Bitcoin Gold forked off the Bitcoin code base to manifest their idea of decentralisation, again, keeping a number of features the same. Their defining factor was the implementation of a GPU friendly, ASIC resistant proof-of-work mining algorithm called Equihash, lowering the barrier to entry to mine. And despite having a controversial 100,000 BTG premine, Bitcoin Gold has still managed to obtain enough market value to see it currently holding number 22 in the cryptoassets market capitalisation rankings.

When evaluating the potential fundamental value of Bitcoin Private, there are a couple of clear important points to consider: (1) retail investors' strong hold of bitcoin and (2) privacy coin exposure. 

  1. Bitcoin has an undoubted pull over the cryptoasset market and it is needless to say a lot of retail Bitcoin investors would like to obtain more or at least keep the amount they have. Because of Bitcoin's first mover effect, most investors would not want to sell their bitcoin or invest more money to obtain a separate privacy coin.
  2. Investors attracted to cryptocurrencies that incorporate privacy features are given a handful of choices, a few being: Monero, Dash and Zcash. But unless investors have been exposed to cryptoassets long enough to know that these aforementioned cryptocurrencies represent coins with privacy features, then there is no simple way to observe that fact.

The cryptoasset ecosystem should be regularly reminded that the end goal of this nascent asset class is mass adoption, and mass adoption translates to the involvement of laypersons. There is a substantial amount of investment, speculation and use from those lacking sufficient technical understanding and those are the people that should be targeted, reducing their barrier to entry. There is almost a kind of promise that if you put 'Bitcoin' in the name of a cryptocurrency then it should behave similarly to Bitcoin. The Bitcoin Private hard fork therefore leverages a branding and recognition effect where it is a better attempt of identifying itself as a privacy coin to users. As all existing bitcoin owners are eligible for the forked coin (provided they are stored on private wallets or exchanges that support the fork), the intention is to capitalise on the popularity of Bitcoin and its vast user-base whilst providing the option to have exposure to a zk-SNARK-embedded privacy coin. Incidentally, the team behind Bitcoin Private provides Bitcoin users the ability to obtain a privacy coin without having to sell their initial bitcoin – an attractive proposition – and take advantage of Bitcoin's first mover effect.

Like Bitcoin Cash and Bitcoin Gold, Bitcoin Private has a real defining factor, something that is not seen often from Bitcoin forks. That factor lies in privacy being added to the Bitcoin fork landscape in which there is clear potential value, stemming from all the scrutiny the Bitcoin blockchain has received from blockchain analysis firms.

VII. PRICING BITCOIN PRIVATE IN THE MID TO LONG-TERM

When attempting to evaluate fundamentals in cryptoassets, community is one facet that cannot be ignored. The Bitcoin Private hard fork is unique in the sense that it already has an established community supporting it from the Zclassic project, whereas most forked coins grow a community afterwards – which can take time. Bitcoin Private is also unique from a comparison standpoint, being classed as both a Bitcoin hard fork and a privacy coin resulting in a couple potential avenues to analyse mid to long-term price action.

Privacy Perspective

The argument could be made that a legitimate Bitcoin hard fork providing inherent value can provide a possible advantage over staple competitors. Looking at cryptocurrencies that feature privacy technology and have large market capitalisations such as Dash (~$3.7 billion, rank: 11), Monero (~$3.7 billion, rank: 12), and Zcash (~$1 billion, rank: 24) who have been around for years, it may be hard to envision. But while trying to be reserved about valuations, take Litecoin (LTC) as an example: an alternative cryptocurrency that started in 2011 and has been marketed as a cheap and fast way to transact digitally. Still, Bitcoin Cash – a cryptocurrency only created August 2017 – has consistently had a larger market capitalisation than Litecoin whilst being marketed with a similar premise. It could be further argued, once again, that because Bitcoin is such a dominating cryptocurrency, users that held it did not want to sell for an alternative cryptocurrency such as Litecoin but still wanted exposure to a cryptocurrency that offered fast transactions with low transaction fees. Hence, receiving the free Bitcoin Cash airdrop was the most favourable option.

Figure 6 Market capitalisation (USD) of Bitcoin Cash v Litecoin.

Likewise with Bitcoin Gold, it is not the first cryptocurrency concerned with the apparent centralisation through ASIC mining. Vertcoin (VTC) – a cryptocurrency originating in 2014 – has also been resisting ASIC mining through producing algorithms that favour GPU miners. Nevertheless, the market capitalisation of Vertcoin has always paled in comparison to Bitcoin Gold where they currently stand at $106 million and $1.3 billion respectively as per CoinMarketCap data.

It appears that the Bitcoin hard fork airdrop mechanism and name adoption is an attractive way of providing exposure of features Bitcoin lacks to users that could also accrue market value. There is no information available right now to suggest that Bitcoin Private can reach similar market capitalisations to Dash and Monero. However, a more sensible comparison can be applied against Zcash; a privacy coin with a lower, albeit very respectable, market capitalisation that is a direct competitor to Bitcoin Private as they sport the same privacy technology. In addition, Bitcoin Private potentially has a competitive advantage in that it assumingly garners a fraction of the Bitcoin user-base. This is not to definitively say that Bitcoin Private will surpass the market value of Zcash, but with enough exchange support it certainly could be in contention.

Despite having a significantly lower market capitalisation than the main privacy players, an intriguing detail about Zcash is that over the majority of the past year its blockchain network has been roughly on par with the Dash network and superior to the Monero network in terms of the number of transactions processed. It demonstrates that zk-SNARK privacy technology is a genuine option for conducting private transactions.

Figure 7 30-day moving average of number of transactions processed per day by Dash, Monero and Zcash.

Bitcoin Forks Perspective

After initial sell-offs from traders and investors who were not prepared to speculate on the potential value of Bitcoin Cash and Bitcoin Gold, both cryptocurrencies have managed to grow substantially in market value as mentioned prior.   Blockchain network usage is one characteristic that can be used as a basis to attempt to rationalise the financial value of cryptoassets. Looking at the last six months of the top 3 Bitcoin cryptocurrencies (a timeframe long enough where all their blockchains have been simultaneously active), Bitcoin Cash and Bitcoin Gold do not come close to the amount of transactions Bitcoin processes.

Figure 8 Number of transactions processed per day by Bitcoin, Bitcoin Cash and Bitcoin Gold.

Examining the 30-day simple moving average chart (of transactions) shown in Figure 9, it can be observed that Bitcoin currently processes 185,328 transactions per day whilst Bitcoin Cash and Bitcoin Gold are processing 19,580 and 3,101 respectively.

Figure 9 30-day moving average of number of transactions processed by Bitcoin, Bitcoin Cash and Bitcoin Gold.

This translates to the Bitcoin Cash and Bitcoin Gold blockchain networks operating at a fraction of Bitcoin’s, roughly at 11% and 1.7% respectively. The results of using these percentage values as the sole values to extrapolate the market value of Bitcoin Cash and Bitcoin Gold against the current BTC value (1 BTC, $8,761.68) are shown in the Table 3.

Interestingly enough, the actual BTC and USD values of BCH – 0.12BTC, $1,007.9 – are reasonably close to the values expressed in the table. On the other hand, the actual BTC and USD values of BTG – 0.0086BTC, $75.05 – are roughly 50% lower than the values expressed in the table and the case could be made that BTG is in fact undervalued. It should be taken into account that showing market value of a cryptoasset only through the amount of transactions processed can be simplistic but it certainly is a significant aspect of the value.

It is difficult to directly compare Bitcoin Cash and Bitcoin Gold to Bitcoin Private because their aims are different, nonetheless there are still instances for comparison. Bitcoin Cash is overtly competing with Bitcoin, marketing itself as providing transactions that are faster and cheaper than Bitcoin and proclaiming to be “the real Bitcoin”. Contrastingly, Bitcoin Private wants to bring widespread adoption of privacy on the blockchain. With this in view, Bitcoin Private can still perform similarly in the fact it verifies and validates 2MB blocks every 2.5 minutes, equivalent to Bitcoin Cash verifying and validating 8MB blocks every 10 minutes. Additionally, it would not be entirely unreasonable to assume that Bitcoin Private performs similarly to Zcash as both cryptocurrencies, in large part, use the same blockchain technology which allows for the conservative extrapolation of Zcash blockchain data to Bitcoin Private. Subsequently, analysing the transaction fees of Zcash against Bitcoin Cash results in Zcash being the cheaper way to transact (which has always been the case), though Bitcoin Cash does process almost more than double the transactions.

Figure 10 Bitcoin Cash v Zcash average transaction fee.

In the case of Bitcoin Gold, their main concern is providing ASIC-resistant mining through the Equihash algorithm, the same algorithm Bitcoin Private is utilising for its mining process. Once again, extrapolating Zcash data to Bitcoin Private, Bitcoin Gold comes short against Zcash in terms of transactions processed and average transaction fee.

Figure 11 Zcash v Bitcoin Gold average transaction fee.

Figure 12 30-day moving average of number of transactions processed by Zcash and Bitcoin Gold.

BTG also processes transactions slower as it has 1MB blocks mined every 10 minutes like Bitcoin.

Bitcoin Private is able to offer similar, if not the same characteristics as Bitcoin Cash and Bitcoin Gold, and therefore the possibility of market share being taken from both is plausible. Bitcoin Gold has a greater chance of suffering value wise due to the introduction of Bitcoin Private as its only selling point is being a Bitcoin-based ASIC-resistant mined coin. The ability to transact privately is just as, or more valuable than GPU mining; thus, it is possible to conceive Bitcoin Private being worth more than Bitcoin Gold in the long-term and becoming the number 2 Bitcoin hard fork.

It should be noted that at the time of the Bitcoin Cash hard fork, the climate within parts of the community for Bitcoin to take whatever steps necessary to revert to a cheap and fast transacting digital currency was extremely tense, bringing about the Segwit2x proposal. Bitcoin Cash took advantage of this climate through aggressive marketing and proclaiming to be “the real Bitcoin” which certainly assisted in propping up its value. The climate for privacy coins are not as tense as for a cheap and fast digital currency but users are increasingly being made aware of the importance of privacy with the growing concern around blockchain scrutiny.

VIII. GOVERNANCE

Community-based cryptocurrencies are great in theory but one of the most important driving forces in cryptoassets are incentive structures and it is difficult for a project to achieve them without governance. It lies closer to the rule than the exception for a development team to cease interest in a project if governance structures are not fixed in the long-term to compensate the work done, as seen with Zclassic. A governance structure leads to continued development, which leads to a potentially better project, which can then ultimately lead to a project with real appealing value. It is hard for a project to succeed without governance and incentive structures, as they facilitate more aggressive road-mapping and prospective features can be developed in confidence of suitable compensation.

A basis for the Zencash (ZEN – another privacy-based cryptocurrency) fork off the Zclassic blockchain on May 23, 2017, stemmed from the lack of governance. Consequently, their development team decided to include an 8.5% mining tariff per block for their Treasury Fund to aid operations, development and marketing; a move that was not met with much resistant, especially due to the blockchain features Zencash intended to provide.

Setting up some semblance of a governance structure was extremely important for Bitcoin Private, particularly from an investor-confidence standpoint to avoid a repeat of Zclassic. The team decided to launch a “Voluntary Miner Contribution Program” in which they made 62,500 BTCP available to miners in return for 50,000 ZCL prior to the fork. In essence, it gave miners the option to donate to the Bitcoin Private Treasury Fund via their hash power. To make it clear, extra BTCP would be created at the time of fork to operate this program; i.e. the donated 50,000 ZCL would be credited at the 1:1 ratio for BTCP to fund the Treasury, thus amounting to a 50,000 BTCP Treasury Fund post fork, whilst an additional 62,500 BTCP would be created at the time of the fork to compensate the miners for their donation prior to the fork. The Voluntary Miner Contribution mining pool ended February 28, 2018 and was met with enough support that over half of the requested ZCL was donated. The mining pool site is no longer available to see the exact amount donated but using the Web Archive, a snapshot of the page on February 28, 2018 shows at least 28,850 ZCL was donated. This constituted to an additional 36,062.5 BTCP being created at the time of fork resulting in an increase of the initial circulating supply to 20,340,275 BTCP.

The Bitcoin Private Treasury Fund will be used for exchange listings (50%), development (25%), marketing (15%) and general administrative functions (10%).

Despite the donated Treasury Fund, it is still not suitable as a long-term governance structure. To attempt to resolve this, the Bitcoin Improvement Proposal 9 (BIP9) has been integrated into the Bitcoin Private blockchain to permit soft forks that allow code changes to be made to the project. One of the first suggested changes is to include a Treasury Fund that functions similarly to Zcash, in which a portion of the block rewards are used to fund the Treasury or a non-profit foundation. This will not occur without a democratic vote in favour of such from the community and any imposed tariff will be used entirely for Bitcoin Private development.  

IX. FUTURE

The benefits and disruptiveness of novel zk-SNARK privacy technology has not gone unnoticed by major world-wide players. Renowned Wall Street investment bank JP Morgan utilise the technology for their permissioned, enterprise blockchain payments platform – Quorom; whilst Vitalik Buterin (co-founder of Ethereum) has stated the prospective use of zk-SNARKs on the Ethereum blockchain, also adding, “personally, I think zk-SNARKs are a hugely important, absolutely game-changing technology” and calling it the “the single most under-hyped thing in cryptography right now” last year.

This adoption has come via ZECC publishing their technology as open-source and free of patents for use by the broader crypto community, meaning any improvements made to the technology by the Zcash team can be implemented by other development teams at their discretion for their own projects, which is something Bitcoin Private intends to do.

The Zcash development team are already in the process of their next major upgrade, codenamed Sapling. As it stands, zk-SNARKs are not quite perfect. Whilst verifying a private Zcash transaction is relatively quick, creating it is slow and computationally resource intensive making it impractical to perform on mobile devices, older desktops and laptops. The improvements pitched by Sapling forecasts more efficient transactions by indicating approximately an 80% reduction in proving time, and a 98% reduction in memory usage – essential requirements to enable private transactions on lower powered devices.

Should the low amount of remaining BTCP cause problems, such as a low collective mining hash rate, a proposed solution is the removal of unclaimed coins via BIP9. If approved, coins would be withdrawn back to the network equally across all wallets, where each wallet with unclaimed coins from the hard fork will lose 0.14% of its coins daily for 2 years. This democratic approach would release a substantial amount of coins for miners whilst giving users adequate time to acquire their forked coins. Moreover, the low daily removal should mitigate any shock to the market value.

X. CONCLUSION

The lack of transaction privacy in Bitcoin has progressively brought about market demand for privacy-based cryptocurrencies due to the scrutiny of its blockchain network by blockchain analysis firms. The novel zk-SNARK technology designed and built by the professional and academic cryptographers of the Zcash Company allows the verification and validation of encrypted data on the blockchain, providing a strong privacy guarantee. Their cryptocurrency, Zcash, utilises zk-SNARKs to facilitate private transactions. Due to Bitcoin's first mover effect and dominance within cryptoassets, investors and users are not always aware of what services are provided by alternative cryptocurrencies or they have such a strong hold of Bitcoin to the point where there is not the slightest consideration to sell any of it, even for a promising alternative cryptocurrency. Bitcoin hard forks appear to be an appealing strategy to offer exposure to features Bitcoin lacks for free, provided the features have some inherent value to a large majority of users as seen with Bitcoin Cash and Bitcoin Gold. Bitcoin Private enters the Bitcoin hard fork landscape wanting to bring widespread adoption of privacy on the blockchain, which is a valuable feature, while still being able to provide a blockchain service akin to both Bitcoin Cash and Bitcoin Gold. It leverages the innovative technology of zk-SNARKs from Zcash and the well-known branding effect of Bitcoin, and marries the two components together. With enough support from exchanges, Bitcoin Private has potential to accrue substantial market value.


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