Alexander Zaidelson: The Future Lies In Private Cryptocurrencies
Alexander Zaidelson, the CEO of the Israel-based startup Beam, explained in his interview to LetKnow.News what the MimbleWimble anonymous protocol is, what distinguishes the MimbleWimble-based cryptocurrency from Monero and Bitcoin, and why decentralized mixers is not the best solution to anonymize your assets.
– Let us know more about yourself.
– I hold a degree in linguistics. Then I worked as a programmer in Israel for 6-7 years. In 2005, I together with some friends of mine started a company that monitored peer2peer networks such as eMule and eDonkey. In some respect, those file sharing networks even resemble
blockchain. As they also consist of nodes, they are democratic and all are equal.
Then I developed a dictionary, which allowed users to get the translation and various definitions of the word by clicking on it in the browser page. Eventually, this program was bought by a large Israeli conglomerate. I was also involved in product management and analytics of mobile services and various apps. After that, I spent two more years working for a venture fund in Israel, which invests in hardware development.
– When did you become interested in cryptocurrencies?
– I started working with cryptocurrencies at the end of 2017. Bitcoin is a brilliant system that uses Proof-of-Work algorithm and allows the parties to trust each other without need for a trust. After that, I got interested in the technology and began to play around with Bitcoin and
Ethereum blockchains. I joined Beam in mid-2017. Since then, I’ve been working here and I think we’re doing some very interesting and important things
– Tell us about the MimbleWimble protocol. What distinguishes MimbleWimble-based cryptocurrencies from Bitcoin and Monero?
– Let’s start with Bitcoin. In simple terms, there is a table, called a Distributed Ledger, that contains data on the sum of money held by each address, and the entire transaction history. This makes it possible to verify the legal background of any transaction at any time. When one address transfer its money to another, the entire network can see that the money was spent only once. After all, the miners’ key task is to make sure that a person hasn’t used the money twice. In case of Bitcoin’s blockchain, it’s easy to check the money owned by any user, as well as all transactions made by him - there’s no privacy there.
Monero used a similar architecture, but it added a few features to mask the transaction history. In addition, a ring signature allows hiding information about a sender and a recepient of funds. Instead of a single transaction, the output goes through 10 addresses arbitrarily picked from the blockchain, and it is infeasible to detect the sender. There are also one-time hidden addresses, and hidden transactions - they do not show the amount of transfer. This helped Monero to achieve a sufficient level of privacy, but there is an opinion that if you take some efforts, you can determine who initiated the transaction via ring signatures.
But even if we think that Monero has no privacy issues, this protocol is rather difficult. Instead of one transaction, they, tentatively speaking, conduct a dozen of transactions. And according to our calculations, a Monero transaction is more voluminous than a Bitcoin transaction. The Bitcoin’s blockchain takes up now 200 GB, then if Monero had the same popularity, its blockchain would reach 1 terabyte. And this is quite a lot, not to mention the time required to download it.
The man who invented MimbleWimble turned everything upside down. MimbleWimble has no addresses at all. Instead, users have a set of keys known only to them. That is, the users need to know their passwords to automatically produce new keys. And each of these keys unlocks a kind of a safety deposit box. These MimbleWimble safety deposit boxes are considered to be a Pedersen commitment. It’s a fairly simple mathematical scheme - a sum multiplied by a huge number - one point on the elliptical curve, plus this key multiplied by another point on the elliptical curve. Both points are publicly known, and the sum and the key are known only to the owner. Accordingly, these coins in the blockchain look like a large number of safe boxes, which all look the same, and it is unclear who owns it and how much money are stored there.
In case of a transaction, a user takes the safety deposit box, sends the key to the recipient, and they both sign the transaction with that key, and then it is sent to the blockchain. In case of Bitcoin’s blockchain, all coins are assigned to a particular address. And in case of MimbleWimble, the coins can be unlocked with a private key, and what is more, each coin requires its own key. And that’s why no one can see anything when looking at blockchain from the outside. This is the first concept of private transactions.
Unlike Bitcoin, MimbleWimble requires a cooperation between these two people because both parties must sign the transaction. On the one hand, this is a drawback, because in Bitcoin it is enough to send the recipient’s address. You can leave for 3 years and you will still have the money. In case of MimbleWimble both users shall be active. During the transaction, both users shall keep their browsers open. In addition to the above, blockchain does not store the entire transaction history, it only stores the current state of these safety deposit boxes and some proof that the transaction was conducted in a fair and correct way. That’s why the blockchain itself weighs less.
– Many anonymous cryptocurrencies suffer from ASIC mining hardware, as there are risks of a 51% attack. Do MimbleWimble-based cryptocurrencies face such problems?
– Any cryptocurrency that uses the Proof-of-Work consensus algorithm has a 51% attack vulnerability. And one of the reasons why this attack doesn’t happen on Bitcoin or other cryptocurrencies is because it’s less profitable. No one will do a 51% attack just for fun, they are aimed at winning something. But you have to understand that if the network is exposed to such attacks, the value of the coin drops very quickly, so it is more profitable to be honest. And if a network member starts stealing, he will get a penalty. At the same time, a 51% attack is a double waste of money. Someone will notice it and the false chain will be determined. There are also mechanisms to track such activities and return the stolen assets.
– In your opinion, what justifies the demand for private cryptocurrencies and how large is it?
– There is a demand, Monero enters the Top-10 cryptocurrencies. Today, most of the activity is speculative. Unfortunately, we do not see a large number of payments in the cryptocurrency so far. Although it starts happening slow and steady. We need privacy for any transactions with any type of valuables - money, stocks, gold, diamonds
That’s the way it works, people don’t want anyone to know how much money they have and where they spend it. Therefore, private currencies is the thing of the future. The future lies in such tools, which help a person keep the results of his or her activities in secret. Today, for example, all Bitcoin transactions are visible to everyone. And it’s actually pretty scary, because if you start buying or receiving money, everyone can know the amount of money you earn and spend.
On the one hand, it’s not a big deal, but it’s freaking annoying, when the entire financial history of a person becomes known. And if we’re talking about a company, it can be destructive for business. Everyone will know how much I pay my employees, and they can be easily pulled out. This is a kind of confidential information that no business wants to disclose. More and more privacy-related projects are emerging on the market for those people who understand this, and the number of such people is increasingly growing.
If we use the cryptocurrency as a currency rather than a financial instrument for
trading on the exchange, it will be required to have the privacy features.
But in addition to privacy, there should also be the reporting capability. Because if we want business to switch to cryptocurrency, there should be accountability, as all organizations shall operate within the legal framework. Therefore, we are working on adding this additional software layer, which will allow creating special transaction traces that can be seen only to auditors. This function will be optional. In this way, we will provide companies with the tools to show their financial results to auditors.
– The U.S. government is interested in tracking the anonymous cryptocurrency transactions. Won’t this hamper the things?
– As far as I know, the U.S. government has published some kind of a proposal calling for solutions to track cryptocurrencies. This problem has already been solved with Bitcoin and Ethereum - all transactions are traceable. But in case of Monero, Zcash or Beam it will be extremely difficult to find a solution, if that’s at all possible.
– Will Bitcoin mixers be able to fully replace anonymous cryptocurrencies?
– Let’s say, you want to get 100 BTC and keep it secret from anybody else. Therefore, I go, say, to the Bitcoin mixer and send 100 BTC there. As a result, the recipient receives 100 BTC from the mixer and everyone can see that the money came from the mixer. And it turns out that a person is apparently doing something extremely secret, when everybody becomes aware of it. On the contrary, this only gives rise to more suspicions. And thus, the users discredit themselves. So I believe that the mixer is not a solution.
– The Litecoin Foundation has previously become interested in the MimbleWimble protocol. Tell us the rest of the story.
– Our cooperation is still in its infancy. They are studying this issue from their part. That is, we are not talking about a joint product, but about how they can integrate MimbleWimble with their network. It’s not exactly a sidechain, but it’s something similar. It is difficult to forecast how effective it will be in meeting privacy challenges because it is built on a protocol which did not originally imply privacy.
– Charlie Lee said that the MimbleWimble privacy technology can be used for Bitcoin transactions as well. To what extent is this true and what is required to make Bitcoin anonymous?
– Theoretically, if Litecoin can be made anonymous, I think that something similar can be done to Bitcoin as well, but it will be only a part of the solution. Today, the whole banking system feels pretty comfortable because it can easily check whether this Bitcoin has been involved in any illegal schemes.
In case of a complete anonymity, it will be required to add some compliance, another level of reporting, which, in fact, we are building now. Perhaps in the future, when we will already have it, Bitcoin developers might want to implement this protocol as a sidechain. I think it is impossible to transfer the entire Bitcoin’s blockchain to anonymity, but they can effectively add some add-ins to ensure anonymity. But we see no signs of moving in this direction.
– What impact do cryptocurrencies have on the traditional financial system? And what functions do they perform?
– I think it’s a technology that can replace the entire banking system or at least part of it. Because the greatest thing about the cryptocurrency is that it eliminates the need for a third party to keep the money safe. In addition, banks charge a commission for each transaction, and they are subject to government intervention. After all, we have witnessed many times when some financial institutions were simply closed or all property and money were forfeited.
Besides, you don’t actually own your money, someone else does it on behalf of the bank, and someone stronger represented by the state can take it away. In addition, fiat money is at risk of inflation, because the state can print this money as it likes.
For its part, the cryptocurrency enables to make cheap payments and purchases all over the world. I think that the technology can replace most of the money functions. Because it allows you to do the same things, ensuring more security. But in this case, the responsibility is solely placed on users as they should always remember the key to their wallets. In case of banks you can solve this problem by calling there and providing certain documents, but it doesn’t work with cryptocurrencies.
I feel the cryptocurrency will eventually become more convenient to use, and it will be able to slowly replace the money. But it’s not something you can achieve overnight, but step by step.
– What is needed for mass adoption of Bitcoin and cryptocurrencies?
– There is a need to introduce, firstly, some more convenient apps, and secondly, some solution for entering the
crypto space. When you already have some cryptocurrency, it is very convenient to make payments and transfer money. But you can still face some troubles when entering the crypto, because it is not always easy to buy coins - you need to get registered, to carry out some manipulations. Sometimes people are just scared. And the volatility of the cryptocurrency can also discourage people. Yes, we have already stablecoins that solve this problem and their number will probably grow.
But we should also pay attention to the image-building aspect, because a common man often hears that some cryptocurrency was stolen, something was hacked. And criminal figures will always find the way to use any thing in their interests.
The system needs some time to eliminate all drawbacks, so that a simple person can trust the cryptocurrencies. It will take a while before the boom that brought the cryptocurrencies to the frontpage headlines at the end of 2017 falls. Yes, a lot of people got to hear about it, but on the other hand, while the industry was growing so furiously, it attracted a lot of incompetent and dishonest players. I hope that their number will decrease in the future, because only the strongest players, committed to intelligently develop technology and create real products, remain in the industry.
In view of this, the industry image will improve over time, and then people will become less afraid of it. Even if people use cryptocurrencies as an investment on a massive scale, it will be a big step forward. And when people know this world better, they will realize that it’s much handier to use the cryptocurrency as a means of payment rather than banking services.