Profit Potentials In Privacy Coins™ #2 – Privacy Coins 101

Tai Zen: What’s up this is Tai Zen again and with me, we have the Honorable, Grandmaster Leonfu.com, The great Oracle Cryptocurrency.

And in this video of series called profit potentials and privacy coins, we have 6 modules and as far as the half of the video series, in second module we got to talk about the privacy sequins 101, I’m going to answer everything that you want to know about Privacycoins, what they are, who’s behind it, what technology’s going on behind it, what’s differences between it and what they’re trying to do.

Before we get started, we got to do the quick sponsorship disclaimer here, this video series has been sponsored by a Privacy coin project to provide an independent third-party review of the major privacy coins project currently active educate the public about the importance of Financial Privacy. So before we get started on the Privacycoins, it’s important that if you’re new to this world of Cryptocurrencies you need to understand what is a Bitcoin blockchain and once you understand that and we’ll transition into what is a Privacy coin.

So real quick here, I have a very good slide that’s provided by Robert Palatnick, he’s the chief technology architect. This is actually one of the slides out of his presentation that I saw that has the best illustration of what a Bitcoin blockchain is and why it’s so powerful and unique, so I bought it from him to use here.

If you want to learn more about it, it’s at the dtcc.com, a video called ‘embracing destruction webinar’ by Robert and then you can check it out for yourself. But in the past, the way that financial technology has evolved is that in the past, we would have 1 central location where everybody would come here and transact at that 1 central location such as a bank or an institution or a government that would issue the currency.

And then we evolved to where each of these users out here started their own, what we call a ledger. So a ledger is an accounting manual that logs in all the transactions between 2 parties or 2 people or between a party and an individual.

So in the past that ledger was centralized in 1 place and everybody had to come there to settle and clear their transaction, then later on it evolves to where each of the companies in the business, as companies grow, as the economy grows, each company has its own ledger and where they record their financial transaction, and each government agency would record their own financial transaction.

So for example, you might have a government agency here like my son was born in Dallas County, so Dallas County has their ledger when my son was born and keep on the birth certificate and if someone dies there in Dallas, they’ll record it into their ledger so that data can be recorded there. And then each bank like the bank of America Chase Bank will have its own ledgers of all the transactions of all their customers.

And then the government, the IRS would have their own ledger who pays the taxes and who doesn’t, so that goes in there. What makes Bitcoin and blockchain technology so you need to know is that it was invented by Satoshi Nakamoto, and he was the first one to create what’s called a publicly distributed ledger that has an accurate county of every transaction that went on.

So for example, if I send you a transaction and they just recorded on one of these ledgers, it also gets broadcasted out so that all the other ledgers in the decentralized distributed network also has a copy of that transaction. Now what’s unique about this and has never been done before is that Satoshi Nakamoto saw that really big computer math problem, the double-spending problem.

So in the past when someone tried to create an electronic cash or electronic currency, the problem that prevent everybody from using it is that when 1 person sends the transaction to someone else, there was no way to tell if that person didn’t copy and paste that same currency or that same bill into someone else. So when Satoshi Nakamoto came along, he decided to take that ledger and distribute and decentralized at everyone so that every time someone makes a transaction, it gets broadcast it out to the entire network, and there has to be a majority agreed that the transaction was correct.

If I sent you 1 Bitcoin that I indeed had 1 Bitcoin in my possession before I can send it to you, so every transaction can be traced back to where it came from. So that was the original Bitcoin blockchain, it was the first time that we have a shared ledger that everyone can agree on, and that cannot be erased and cannot be modified after it’s been added to the ledger.

So now let’s go to the next slide, the texts in a red note for you to understand how to read the transactions inside the ledger so the blue and the green and all that is all a real transaction inside the public ledger and this is how it looks when you look inside the ledger. So you want to walk them through this Bitcoin ledger?

Leon Fu: It’s called a blockchain because these transactions are organized into blocks, so every block starts off with what’s known as a Coinbase transaction. These are generated by a miner, and what a Coin-based transaction is, it’s a newly created Bitcoin, these are Bitcoins that basically you could say just are generated, the reward for the miner who mines this block. And that’s where all Bitcoin start off.

Tai Zen: Leon used the term mining, simply means that the computers that were used to process all the Bitcoin transaction at this moment, it was all gathered all together and put inside this block data, and this block its number is 456018. So you go to blockchain.info and you type in this blockchain block number, all the data will come up.

Leon Fu: So you see in the Bitcoin ledger is every transaction can be traded from 1 account to another account. So in this case, this account now has 3.9 Bitcoin sent to it. Where did it come from?

Where did these 3.9 Bitcoins come from? It came from here, this account number. And this account sent 3.91 Bitcoins to these 2 accounts, if you add these 2 numbers up, the total of this number down here.

So if you click on this account number, you can see all the transactions that account sent to. Similarly, if you want to see where did this account get 3.91 Bitcoins to come from? All you have to do is click on this’ called the block explorer, all you have to do is click on this and then you can see which accounts send this account 3.9 Bitcoin.

And you can keep doing this all the way back to the block to the day that the Bitcoin was mined through this transaction. Eventually, if you keep going back far enough, you’ll eventually hit a block where those Bitcoins where they came out of.

Tai Zen: And this newly generated coin, this 14 Bitcoins right here was generated, the system automatically rewards the computer who process all these transactions, in the world of Bitcoin it’s called mining, and whoever process all this got rewarded those 14 Bitcoin. So the system generated and when it says system generated, it is called a coin base, and it has no inputs.

Leon Fu: In other words, these coins didn’t come from anywhere, they were just created as a reward for the computer that processes those transactions. And in 2017, the block reward was 12.5, the reason you see 14 here’s that those are all the fees, every transaction includes a fee for processing that transaction that’s also added, given to the miners who processed it.

So he gets the 12.5 Bitcoins that are newly generated, they came from nowhere and then plus the fees for all the transaction fees that he processed.

Tai Zen: Right now Bitcoins is at like close to $1,300, that is over $15,000 worth of reward for this miner or this processor to process all those Bitcoin transactions in the last 10 minutes. And then you said that every transaction’s public invisible so it’s right there. Does someone need special software or do they need to pay to see?

Leon Fu: No, this is a website that you could go to, it’s from blockchain.info, blockchain.info is where this screenshot came from, it’s a website that you can go to, you can just click on any block number, we happened to click on this block number which is happened to be the most current one, but you can go click on any block number from block number 0 up till now. Anywhere in the world, this is an open internet.

This is the problem, this is why Bitcoin does not have fungibility because of every single Bitcoin, its entire history publicly visible, and that is the problem these privacy projects are trying to solve. This destroys the fungibility of Bitcoin because we don’t know who these people are, these are just random account numbers, but if someone were to be able to track down this account number, somehow I’m able to find out that’s Tai Zen, then I can go to Tai Zen and you were sent 3.9 Bitcoin, see where did it come from.

Tai Zen: So because someone can threaten you, it’s not 100% privacy. So basically what you’re saying is that the Bitcoin addresses are pseudonymous, which you can use a fake name or a fake serial number but the loss of privacy can occur if identities can be linked to any address. So as soon as somebody knows who that person is that owns this address, that account number, then the law enforcement authorities of someone else and an individual can dig deeper to find where it came from.

So you’re saying that the Bitcoin mixers and HD wallets are used to maintain privacy but each has its own downsides such as requiring trust, expensive, and or slow. So let’s dive a little bit deeper into this, you always talk about fungibility, and you helped me understand fungibility. But what I think, the person that best explain what fungibility is, we’re going to use Andreas Antonopoulos again, world-famous Bitcoin evangelist, and he said that he defines fungibility the easiest way.

He said that the fungibility means that the money in my pocket is the same as the money in your pocket, which means that it doesn’t matter if my money came from a legal or illegal source, it does not matter that came from a rich person or poor person, the Bitcoin that’s in my possession, it has the exact same value and equality as the Bitcoin that’s in your pocket. I take a dollar bill for example, the dollar bill that I have in my pocket, regardless if I robbed the bank and got that dollar bill or if I got it from a drug dealer, I got it from a prostitute, I’ve got it from illegal sources, when I walk into a grocery store I can buy the same amount of food with the same as what you have.

Throughout this whole theme of Privacy coins, the purpose of Privacy coins is to solve this fungibility problem. And so we’re going to keep coming back to it over and over again, and just remember that every time we say the term fungibility, it just means that the dollar in your pocket is the same as a dollar in my pocket. Talk about what a Privacy coin is?

Leon Fu: All the privacy projects are trying to solve the fungibility problems that Bitcoin has because so that every unit of the currency is identical to every other unit. Once again Bitcoin is not entirely fungible because every Satoshi is a small unit of Bitcoin, is traceable back to the block that it was mined.

So you can trace every Bitcoin to the day it came into existence, there’s a complete history attached to all Bitcoins and there will be forever, you can trace all the Bitcoins back to when Bitcoin started.

Tai Zen: So when I add this in case someone’s new to the world of Cryptocurrency. Satoshi is the original computer scientist that created Bitcoin and invented it, but nobody knows who he is, they don’t know where he is or anything like that, they just know it’s an anonymous person.

And so in honor of Satoshi Nakamoto, the smallest unit in which you can send to anyone in the world of Cryptocurrencies is called a Satoshi, that’s 8 decimal places out, and so the community named it after him.

Leon Fu: Because of that history, each unit of Bitcoin can be used for blacklisting and even censorship by miners. And this is not theoretical, this is actually been done. For example, it happened where even if an exchange got hacked and I don’t remember quick exchange where they can see that the exchange says hey, my Bitcoins was stolen, and then they called up all the exchanges they don’t accept any transaction from that.

Tai Zen: The NXT is a new Cryptocurrency that came out after Bitcoin was invented, it came out at the end of 2013 and when it was traded on one of the exchanges, someone had hacked and taken 50 million from the exchange, it was sent to a different exchange and they tried to cash out, they blacklisted that account so that the person that stole it could not move the money.

And also we’ll use another coin example, remember with Ethereum, the DAO tokens were stolen during that whole Fiasco, a hacker hacked into the Ethereum network and enter to the DAO code and stole some of the coins, and when they tried to cash it out, there were people out there that would follow it every step of the way.

Also here’s another example is that when the FBI seized the Bitcoins from Silk Road, what they did was they were going to auction them off in 30,000 Bitcoin blocks, and when they had they are stored, you can go into the blockchain explorer and see where those FBI seized Bitcoin.

And we’ve also had situations where the hackers would hack into a particular Bitcoin account and there would be people in the Bitcoin community that would send a small transaction, 1 or 2 Satoshi, towards that Bitcoin account just so they can track it and monitor where it’s going.

Leon Fu: Even Ethereum, Ethereum is the second most valuable Cryptocurrency at the moment, it’s including privacy features, they have a partnership by including Zero-Knowledge Proof developed from Zcash. So even Ethereum, which is a public ledger just like Bitcoin, but it’s programmable and they have plans of a partnership or Zcash being able to do smart contracts, vice versa.

Right now there’s a partnership between them, so Privacy is widely recognized even within the Cryptocurrency community as being extremely important. In 2016, we didn’t have any of these Cryptocurrencies, we didn’t have any Monero, we didn’t have any Dashes, because we didn’t understand the use case beyond buying drugs and evading taxes.

That’s really what I thought up until the middle of last year, that’s all the case was people, buying drugs. So when Monero exploded in 2016, I started to think about this, I start to think about is this really just about drugs, and I realized that after doing some more research into space because I had missed Monero among others that this is a lot more than just privacy.

It’s a much bigger market than I had initially thought and that’s why we missed, that we didn’t have any positions in these Cryptocurrencies. I will also say that the first use case of Bitcoin was buying drugs on Silk Road, that is the 1st.

Tai Zen: When you research it and came across that, why was it a game-changer for you?

Leon Fu: Because if you look at Bitcoin when it first appeared had no real use cases, it was an experiment, it was an idea that Cryptographers, basically mathematicians and academic people buying it to play around with it because it was a computer science problem. But I would say after that, the next people to use it were these hardcore libertarians, the people that are an anti-Federal reserve, the real hardcore libertarian.

They picked on this idea because this was actually honest money that couldn’t be controlled by any central authority, and they’re all against freedom, that’s what they’re all about. But that’s still a French group, these are still French groups of people, Bitcoin did not get to even $10 or $50 on just those groups of people because they’re a minority of the population.

I will say the first mass use case was when Silk Road opened and people wanted to buy drugs, we’re not going to make any judgment whether or not people should use drugs, just the fact that people use drugs, they’ve always had for thousands of years, and so that is when Bitcoin actually went from being I would say an ideological, either from academic reasons or political reasons, I actually need to buy this to get something I want or something I need.

And I would argue that the first 1 or 2 billion dollars, which is about the first $100 or $200 from zero came from that reason. And why was Bitcoin used for that? Why didn’t they take PayPal or Visa, Mastercard?

And it has to do with privacy, our point here isn’t to say whether Silk Road was good or bad, the point there was the first use case was because of Privacy, now we know today that it’s not really private because these transactions can be linked, but back in 2011, it was a private thing you could get in that was private enough of that time, but today we know that we are aware a lot more sophisticated and we know that it’s not really as private as it needs to be.

Tai Zen: So I want to add this before we go to the next line, I want to add this so you can understand this. Now we just talked about the first use case of Bitcoin was on Silk Road to buy drugs, and that’s what raised it to 1 to 2 billion dollars in market cap for Bitcoin, but there is no way that we are advocating that you invest into Privacy Coins or look to invest into Privacy coins because of drugs because there’re things that we’re going to talk about here coming up shortly that are way more valuable than drugs. So you want to go ahead and talk about the investment case number 2 for Privacy coin?

Leon Fu: Drugs and taxes, they’re just the obvious cases for Privacy, these are just like why do you need privacy, that’s why the stigma right now is because these are obviously the use cases, it’s very much the same as when the internet first came out, it was also Email, it was the obvious one and a lot of other nefarious things when the Internet first came out. We have to see beyond that, as an investor you have to develop a sense to see what’s beyond the obvious.

So the value of Privacy Coin, it’s much deeper than that, we explained in the last video why, especially financial privacy in our case it’s the foundation of all of our other freedoms, it truly is. And our privacy is being attacked, we have a war on cash where governments around the world are trying turn us into a cashless society, and the reason for that is they want to trace all of our financial activity.

India is our recent example where they banned most of their currency, the government just one day out of the blue said your money is not worth anything, turn them all in, the 500 Euro note is trying to take out these large bills out of circulation. You can walk around with more than $10,000, you certainly can’t walk across a border with more than $10,000 without declaring it if you go to any airport or an international border.

There is a big sign there that says if you are carrying more than $10,000 in cash, you have to tell them about it, the border officials. And the governments around the world are trying to justify this, terrorism, tax evasion, money laundering, really as an excuse.

And I don’t want to get into a political argument here, but these are the facts, they are there doing this right now. So this comes at a cost of curtailing personal freedom and transparency, it’s happening as we speak today. WikiLeaks is a site where they report on government watchdog, they’re entirely a news organization.

What they do is they publish and protect whistleblowers, people that have worked in government or have information about governments around the world of their wrongdoing, and they publish it, they Wiki-leaks about that and of course government don’t like this and they’re trying to block, cut off their funding sources because of the journalism that they’re doing.

Tai Zen: So what you’re saying that the government wanted to shut them down and not expose the government of the different country, so they did that by cutting off the credit card payment.

Leon Fu: That’s an investment case, is why these projects have the potential to be far more valuable than where they are right now. What does privacy worth? Even if we just take the obvious use cases that people just want to buy drugs, that alone is worth billions perhaps trillions of dollars.

And I say billions because we know Silk Road transacted billions of dollars. So even I didn’t really even think that drugs actually worth this much but just drugs alone is worth. What’s much more valuable is what is our freedom and our privacy worth.

I don’t have a number, I can’t put a number to that, I don’t know what is freedom and privacy worth, I don’t know if I can put up billions or trillions or more than that, I don’t know. But what I do know is that its orders of magnitude greater than any of these projects put together, so the potential is there and that’s the investment case.

Tai Zen: So basically you’re saying that the investment case for looking at Privacy Coin is that it’s worth many more times then what we’re talking about, it’s worth thousands of times more than any of these projects are currently valued. You say that because the drug market only targets a small population of the world, whereas freedom and privacy are universal.

We’re broadcasting from Atlanta right now, and the center for disease control is here in Atlanta, and they are the ones who do all the research and know how many people died because of a Marijuana overdose, Heroin overdose, Cocaine overdose, so they have all those stats here from the US. And I think that a few years ago, the number of deaths in America that was caused by Marijuana was like a couple of few thousand, and compare to someone who dies of smoking cigarette was over hundreds of 3,000 and at the time that I look, it was less than 5,000 to the people that died from Marijuana.

So what I’m saying is that the number of people that are affected by drugs is very small compared to the number of people that are affected by freedom and privacy. So that’s why you’re saying it’s a bigger market.

Leon Fu: We all care about our freedoms, we all care about our personal privacy and that’s why the magnitude we’re going back to investors that there’s a huge potential here for any of these privacy projects. If they succeed in their goals of bringing privacy to the masses, that is 10, 100 of billions or more, there’s no way I can put a number of that, a lot more than what it’s worth now.

Tai Zen: You said that the goal of Privacy coins is to create fungibility, and fungibility is achieved by obfuscating the transaction history of each coin.

Leon Fu: The dollar bill in my pocket doesn’t have a history attached to it, but the Bitcoins in my pocket does.

Tai Zen: So let’s just let the audience know that the term obfuscates means that make obscure, uncertain, unclear, unintelligible, it does not mean to hide. Because mean to hide has a negative connotation to it and that’s not what the purpose of the Privacy coins are, it’s just to make you uncertain, unclear and unintelligible of where it came from and who sent and who received it.

So you mentioned right here that cash is fungible because there’s no historical record of the transaction, so cash has better privacy properties than most of these Cryptocurrencies do. You talk about Bitcoins are not entirely fungible because of its transaction history, because you can see who sent it, not who sent it but what account it came from and the quantity and the date and everything.

So the problem is how do we simultaneously obfuscate a coin transaction history and prevent double-spending at the same time. So how do we make it so that the transaction is unclear, unintelligible and uncertain but at the same time prevent someone from copying and pasting that same currency and sending it to multiple people and cause the issue of double-spending?

Leon Fu: Because Bitcoin has a transparent ledger so that everyone can see that you actually had the money, everything balances out and that’s why it’s completely transparent so that there’s accurate accounting for all the Bitcoin in existence.

Tai Zen: Each privacy coin has a different method to obfuscate the transaction history, so let’s have you talked about that. In the world of Cryptocurrencies, it’s split up into separate buckets, hear the example of 3 buckets.

For example, the first bucket is a currency bucket which includes Cryptocurrencies such as Bitcoin which was the original one that was created, and then there’s another Cryptocurrency, Litecoin, Dogecoin, and Tether. We have another bucket that Cryptocurrency such as Ethereum, Maidsafe, Storage and Golem fall in what we call the distributed computing bucket.

And then we have the Privacy Coin bucket, which includes such as Dash, Shadowcash, Monero, Komodo, Boolberryand Zcash. So we’re going to zoom in on just the Privacy coin bucket just for now.

So you said that the Privacy coin bucket is segmented into 3 major sub-buckets, a bucket within a bucket. So talk about those 3.

Leon Fu: So these 3 are how do each of these projects achieve fungibility, how do these projects protect your privacy. In 2017, all the projects use one of these 3 methods, coin mixing, ring signatures and the brand new kid on the block, called zk-SNARKs.

Tai Zen: So let’s talk about the first technology used to create privacy and fungibility with these Privacy coins, talk about the coin mixing.

Leon Fu: Mixing was the first way to help maintain fungibility and help protect your privacy. It can be used with any Cryptocurrency including Bitcoin and any other one. Basically, all it means that you send your coins to what we call a mixer, so you sent your money into this mixer and it spins around and it spits back out the same amount money back to you.

So you basically send it some coins and you get back the same quantity of some other random coins. What the mixer actually received coins from many users and randomly sends back the same amount of coins back to the original users, so you’re getting somebody else’s coins, you don’t know who, no one else knows who either because it all went to him and then he just sent it back all back out.

So this can be used with any Crypto, but there’s some Crypto such as Dash that they have mixers that are built into the coin itself, these mixers are known as Masternotes. Rather say in Bitcoin, you may have to go to a third party, you may have to go to a different project to archive those.

Tai Zen: So what are some of the advantages that you see in coin mixing?

Leon Fu: Well it’s the most obvious so that’s why it was the first. This was the most obvious way to help create some privacy by basically everyone let’s all put our money into a pot and just randomly grab it back out, shake it up and send it back out, no one knows who got who’s the coin.

And so it’s very common like if you said that hey you need some privacy, you’re afraid your transaction being traced, even up to today this is the simplest way to do it, send your coins to a mixer.

Tai Zen: Even though we have a picture of a cement mixing truck here, the process is done by computer software, I don’t want people to think that we actually dumped a bunch of coins, tokens or dollar bills inside a cement truck and actually run it through. So what are some of the disadvantages?

Leon Fu: There’re several problems. First of all, you have to trust the mixer not to steal your money, because you’re actually giving him or her your money and hoping that he gives you back the same amount of money. The second problem is the mixer knows that he got your Bitcoins and all that he also knows who’s Bitcoin he sent back to you because when you say alright here are some coins, he knows it came from you, he also knows where you ask him to send it to.

They claim and their reputation is if that’s their business, it’s a trust-based business. The second disadvantage is it costs money to do that, this isn’t free, you got to pay somebody to mix your coins, is generally a fee, typically half a percent, somewhere around there, could be more could be less, but there is a fee to do this.

So there’re a few reasons to be slow, it’s also not instantaneous, it’s not like I need to make some coins, I send them and they’re mixed. Generally, it takes a while after I send my Bitcoins or any other coin. The first problem is if I have a large amount, the mixer may not have enough coins to give me back.

Tai Zen: Let’s say Satoshi Nakamoto, the original inventor, he decides to move his million Bitcoins, let’s say he wants to move a thousand Bitcoins, he wants to send you a thousand Bitcoins, send me a thousand Bitcoins for doing such a great job, how would he mix it up so people don’t know where it came from?

Leon Fu: Most of the mixers that I know about that they don’t really have more than like a thousand Bitcoins in their inventory available for mixing. That’s one problem, sometimes mixing one round is not enough, Dash has this idea where there’s this little setting where you have to send it to several mixers, you got to mix it and then mix it again to help maintain your privacy because there are some very clever people who are still able to trace, take them a lot of effort but if they really want to, they could.

The third reason that I just thought of that we didn’t put on the slide is that you might want to put that delay in yourself so nobody can track that transaction. Because if I sent 1.52 Bitcoins into this mixer and immediately the exact same amount came out, doesn’t take a genius to figure out that those are probably the same.

You may purposefully delay, ask the mixer to wait several days or several hours, several days, several weeks even, before you send it back to me because I don’t want it to be obvious that if that much went in and immediately that much came out, pretty much people can say those are the same. So there are some more disadvantages, there’re several just why all these Privacy projects exist.

It’s not 100% private, it obfuscates the identities of the sender and receiver but it doesn’t actually obfuscate the transactions themselves, the Bitcoin blockchain is still a public blockchain at the end ò the day. And like we’ve had mentioned before, it’s centralized and the mixer still knows so, therefore, it’s not trustless.

Tai Zen: But you still have to rely on a human being to make sure they do their job and do it correctly. So talk about a couple of the mixing services.

Leon Fu: Some of these projects are trying to solve the problem, some of the problems that we just mention here and 2 popular projects that are working with Bitcoin because Bitcoin is still by far the most valuable, most widely used so people still want to try to solve this problem with Bitcoin, and they’re trying to improve upon the model of there’s a central mixer that everyone sends their money to and you hope that he sends it back out.

One service’s called Coinjoin, Coinjoin is a service where if you want to make a payment, you find someone else to make a payment with you. Let’s say you and I want to pay somebody some Bitcoin and I want to send 2 Bitcoins and you want to send 5 Bitcoins.

So there are 7 Bitcoins out there and I want to send it to Bob and you want to send it to Alice, and so we take our 7 Bitcoins, put them together and in those 7 Bitcoins, 2 of them go to Allison, 5 of them go to Bob or vice versa. So it’s not clear to anyone, that’s what’s on the blockchain, that’s what everyone sees. But they can’t entirely say did Leon pay Bob or did Tai pay Bob or did 1 person pay both?

Once again, it’s not completely private, but it’s better than what it was. TumbleBit is a relatively new, another notable project that’s also trying to work with Bitcoin where it’s in a way where they’re using transaction contracts where everyone sends their money, and this is quite complex, which is why I have a link here so that you can go research for more information.

But it’s a way where people send their Bitcoins into a pool of Bitcoins, and then there’s a secret puzzle that you pass along back and forth to each other that unlock the Bitcoins from that pool. So it’s trustless because it’s mathematical, it’s based on math where you need some kind of a puzzle or a key to unlock those Bitcoins to get them out of the pool and so, therefore, no one can really steal the money.

And so it’s a way, a trustless way to help make Bitcoins but it’s in its early stages currently, I’m not sure if you can actually use it, I think it might only be in a test phase but it’s another idea of how to reduce some of the disadvantages of coin mixing that we have.

Tai Zen: So that’s a lot of information on the mixing, let’s the transition into the ring signatures which is another type of technology that they used to make the Privacy coins fungible and obfuscate the transaction. And this one you said is called ring signature.

Leon Fu: In cartography what it what is a ring signature? Ring signature is basically a group of people have a bunch of keys, and there’s a signature that is valid that you can mathematically prove it was one of those people that signed that transaction, but you can’t prove who actually signed it, could have been me, you or someone else in that group.

We don’t actually know who, so it creates plausible deniability, that’s the basic idea. And this way of using ring signatures was publishing a white paper called Cryptonote, who published a white paper documenting the idea, and if you go to Cryptonote website, they even had a proof of concept demonstrating that this idea works.

But they never actually made a coin called Cryptonote, it was more of what they released was a proof of concept that was a prototype demonstrating this whitepaper could actually be done. So Bytecoin was the first to actually implement a Cryptocurrency off the innovations that Cryptonote developed.

Tai Zen: Just a reminder, the Privacy coin that went up to like 300%, it was the smallest performing the smallest gainer in 2016 among the Privacy coin.

Leon Fu: Using a Cryptonote method which you see is watching a bunch of transactions where you’re can’t be entirely sure which account paid which account, every transaction has possible deniability. Even though the details of each transaction are there, we can’t really trace it as I showed you with Bitcoin where you can just click on the account numbers and just to keep going all the way back, you can’t do that with Cryptonote or Cryptocurrencies based on the Cryptonote whitepaper.

So Bytecoin was the first to come out with a Cryptocurrency based on this technology. So how is this happening? We’re protecting the senders of privacy by taking a bunch of other outputs and signing a transaction so that there’s no way to know exactly who sent that transaction. Now there’s a group that you know one of these accounts signed that transaction but you can’t say who.

Tai Zen: You said that new public keys are generated for each receiver and sender, but only the receiver can recover the private key to send.

Leon Fu: The public keys are generated for each transaction so a bunch of outputs is joined together so that you can’t quite say who sent it, but that receiver, the person that’s getting the money knows who sent it. He’s able to pull out the private key then send his coins because obviously, he received it, he needs to be able to send it.

That’s the only person who knows who is the real sender among that group of accounts, is the person receiving the money. This makes it anybody else who doesn’t have the private keys to that send key, everyone else there’s possible deniability. You can always say that it wasn’t me.

Tai Zen: Let’s just say that I deny it because I’m part of that group. So that means that there’s no way that you can 100% prove that it was me. But there’s hope you have the private key, so it can be done.

Leon Fu: The point of this is he knows that anyway, if it even with cash, if I pay you cash, you know it was me, you can say it was me, in this case, you might be able to prove because you could sign a transaction. Remember what the Private projects, they are trying to prevent third parties from interfering from coming in between 2 people.

So after Bytecoin, there’s a bit of drama behind that which was about Bytecoin, but there were many forks or variance of Bytecoins, after Bytecoins came out. And the most popular one today is now Monero, which is the fourth largest most valuable Cryptocurrency.

So Montero has taken hold on one of the Darknet, the reason for that is you can actually buy drugs on Alphabay and other Darknet Markets. But there are dozens of other forks of Bytecoin, Boolberry’s well-known and they all have their features and technical changes and different proof of work, messaging features that they have.

Tai Zen: So I want to interject here and mention this. This is very notable that Monero, pretty much a fork or a rebrand or a remarketing of Bytecoin.

If you watch the previous video, you’ll hear me talk about that and I’m going to bring it up again here because it’s very important, because later on, we’re going to talk about some other coins that are attempting to rebrand or remarket themselves, if you haven’t seen the previous video, go back and watch the first module 1 video and see the explosion in price in Monero once they rebranded themselves.

So that is one of the clues that you look for in a Privacy coin project to see if they’re able to adapt to the markets and remarket and rebrand themselves. Let’s talk about the advantages of ring signature.

Leon Fu: You don’t need these mixers, you don’t need these people that we trust to not steal your money to not reveal your identity, there is none of that needed. There are no Masternodes such as in Dash where once again there are trusted parties on the network although that’s still built-in, although it becomes trustless and because it’s trustless there’s also no single point of failure.

And unlike project such as CoinJoin, you don’t have to go find somebody to join a transaction with you, I don’t have to find a willing participant. So that’s the advantages of the ring signature. So it is not 100% private, it’s not clear who the identities were, but details of the transactions are still visible as to like when they were sent.

Tai Zen: If I send you a transaction using Monero, no one can see that I sent it to you and that you received it from me, but the date, the time, the quantity of the transaction.

Leon Fu: It doesn’t hide transactions, and even until the second point here, until the CT (Confidential Transaction), you could even see the amounts being moved. So this is a brand-new feature that they had to obfuscate the amount up until January, you can see the amounts being moved.

Tai Zen: So now let’s move on to the third technology that’s used to create fungibility and create privacy and the Privacy coins, it’s called zk-SNARKs and we have a picture of a black box herewith has a question mark on it, does anyone know what this is?

Leon Fu: Yes people do know what it is but zk-SNARKs is like the new kid on the block, it’s the idea of using very advanced Cryptographic technique to prove that there’s no double-spending, while at the same time, hiding all the transaction details. It’s trying to mathematically prove that you didn’t spend the same coin, you actually had the money to spend while at the same time not telling anybody how much money you had.

This is something for the zero-knowledge proof, in mathematics, it’s a way for 1 party to prove to another party that something is true, a statement is true without revealing anything about the statement other than its true. So it’s basically using some mathematical magic, I can prove to you Tai that what I have in this black box, it’s true, I don’t have to show you what it is, whatever is in this box it’s true, but you’re actually don’t know what it is, it’s still math and you could Wikipedia, Google zero-knowledge proofs to have more details.

So that the latest and greatest it’s been worked on for 2 years, it uses very advanced Cryptography that I don’t think more than a few dozen people even understand at this point. So Zcash is by far the biggest project that is using this zk-SNARKs technology but of course, all of these Software’s open-source, so there’s many variants on that, Zcoin, ZClassicand Komodo is one of them are basically taking the source code and building on top of the work done by Zcash.

So purposes of Zk-SNARKs is to bring privacy to another level, this is not just obfuscation, it is just outright hiding, it’s just a black box. Meanwhile other things like mixing and ring signatures, it’s not really hiding its obfuscating, it’s not making it unclear how the money is moving but it doesn’t really hide that the fact that the money is moving. So this is really bringing Privacy to a new level.

Tai Zen: Let’s say that we were in a court of law or something like that, the coin mixing, the ring signature will prove it beyond a reasonable doubt but with the zk-SNARKs, you can’t see at all. So because of this black box technology here with the zk-SNARKs, what’s the disadvantage of it?

Leon Fu: So it’s not widely understood, the other 2, coin mixing is very well understood, even ring signatures is very well understood. But is still magic to many of us. During the setup, there were these Private keys that the Zcash team developers had to destroy and these were like the private keys that were generated for its initial setup.

And that they actually refer to this as toxic waste, I am not making that up, and so what they needed was the ceremony to make sure that this toxic waste also is known as ‘Shards’ were destroyed. So it was this piece of data that if it were compromised would cause the entire system to basically collapse, people could then counterfeit unlimited amounts of Zcash. The technology to do this first initial setup requires some kind of private key that is like the magic key.

Tai Zen: Because we have the required trust in the original developer that’s doing this, the natural question that the audience will probably ask is what is the incentive for them to not try to gain the system?

Leon Fu: It is backed by a corporation, Zcash is back by Central Corporation, VC-funds, they have lots of money that were put into it, if you go on their website almost the entire community, all the major big players in the blockchain space has invested some amount of money into this corporation.

They also have a scheme where they’re mining, 20% of their mining rewards is being sent back to these developers to fund them. So they have a lifetime of funding from the mining as long as these coins have value, they have a constant stream of income.

Tai Zen: So that’s their incentive to not try to gain the system and cheat the system because they if they do, they’ll lose that fund. Because you’re a software engineer, you said that they could be a bug in the code?

Leon Fu: All of these coins they don’t hide the number of coins that are on the chain, so people can add them up and make sure everything balances and there are the numbers of coins that they’re supposed to be. With the Zcash we can’t do that because everything is completely obfuscated, everything is completely hidden, that’s like in this black box.

So if someone found the bug, if somehow these toxic waste wasn’t destroyed, they could start making printing unlimited Zcash coins and no one can know, this is a black box. This is important because this isn’t just theoretical, this actually happened to a project that used the similar technology called Zcoin, Zcoin uses a very similar technology zk-SNARKs, but a difference in that project was that they didn’t hide the amount, the amounts were still public.

So a hacker or someone found a bug in their code and started making new coins and the community was able to pick that up to detect that, that counterfeiting was happening and they were able to then track down the bug and fix the bug. If something like that were to happen to Zcash, I don’t think anyone would know until it was too late, because everything is so hidden.

Tai Zen: Now let’s talk about some of the examples of the Privacy coins in each sub-bucket so that the viewers know what are the Privacy coins that fall under which bucket. So in the coin mixing bucket, you’re saying that Dash and Navcoin use the coin mixing technology.

Leon Fu: They use mixing but similar to Bitcoin mixer but it built into their coin, it’s not a third-party, it’s within themselves, it’s not like a company that’s mixing Bitcoins, it’s not like Tumblebit or Coinjoin project, that is a separate project that’s running.

Tai Zen: By the way, there’s more than just 2, we just chose the ones that have more liquidity, more volume or notable in the community. So if it’s not listed here, it’s not because, for any reason, it’s not because we didn’t want to, it’s just because it’s not very well-known, so we’re just looking at the ones are known.

In the ring signature sub-bucket, we have Monero, we have Boolberry, we have Shadowcash, and then we have Bytecoin and then in the zk-SNARKs we have obviously the Zcash and then Komodo and then there’s also Zcoin, there’s another fork called Zclassic, a bunch of them are just variance of Zcash. So those are the 3 sub-bucket inside the Zcoin bucket, and it’s divided and categorized based on the technology that uses fungibility and privacy within the Privacy coin bucket.

And in the future video, you’ll go into detail about each of the major one, the big ones that are worth noting and then we’ll go from there. Just to summarize this module here, Bitcoin was the first Cryptocurrency invented by Satoshi Nakamoto, he invented the first publicly distributed Blockchain public ledger, and then Cryptocurrencies are divided into several different buckets, depending on what their objectives are.

In this video series, we’re focusing on the Privacy coin bucket and inside the Privacy coin bucket, there’re 3 sub-buckets based on their Privacy coin, Privacy technology which includes the coin mixing, the ring signatures, and the zk-SNARKs technology. And then we talked about the differences between the privacy coin technology and we understood why which privacy coin falls into which bucket in this video.

And Imma give you a quick teaser on what’s coming up in the next video, in the upcoming video we’re going to be talking about the overview and a closer look at each of the top privacy coins that we’ve been referencing, we’ll focus in on detail about it so you’ll understand more detail. We’ll talk about the people behind each privacy coin, the goal of each private coin and who is each privacy coin try to target.

And as an investor, this is extremely important because if you’re targeting the wrong people, you’re not going to get the growth in your investment as you want. For example like Bytecoin, whoever they’re targeting was not very good, that’s why they only came out with 300% growth in 2016.

Meanwhile, Monero which is a rebrand and a remarketing of Bytecoin, it’s a fork but they’re trying to target a different group of people. So because of that, they targeted correctly and it went up to over 3,000% of profit in the year 2016. And then we’ll talk about the notable privacy coins that worth noting, they’re not major privacy coins but they are worth noting.

So finally we want to wrap this up with our Sponsorship Disclaimer, this video has been sponsored by a privacy coin project to provide an independent third-party review of the major privacy coin project currently active to educate the public about the importance of financial privacy.

So thanks for watching this video, and if you have any friends, family or co-workers or colleges that are interested in investing in Cryptocurrency, please share this video with them, and we look forward to seeing you in the future video.

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4 Responses

  1. Hi guys thanks for the Wonderful work .
    I wonder what do you think about shadow cash .
    There are certain reports on the net that this is a scam with a lot of Insta mining (bitcointalk.org)
    But the performance over the last weeks and months was very good .
    Are you invested in shadow coin?

  2. Wow…I just started watching all your videos on Youtube. I’ve picked up a lot. Thanks for putting this out there. I look forward to learning more and getting myself set up with a wallet. BIG THANK YOU!!

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