Watch out, Bitcoin - CSAIL researchers help develop virtual currency that's actually anonymous

One of the biggest myths out there about Bitcoin is that it’s anonymous.

Sure, you can theoretically make purchases without revealing your personal info, but your entire payment history is still on public view, including the origin and destination addresses and even your running account balance.

A growing body of research has shown that, by studying users’ spending habits, it’s easy to glean a lot of information, including the real-life identity of users. (In this respect, it's actually less secure than traditional banking.)

Are Bitcoin's benefits of transparency and lower transaction fees worth the potential privacy risks? A team featuring CSAIL researchers thinks not, and has developed the first decentralized cryptocurrency that mathematically guarantees anonymity.

Graduate students Alessandro Chiesa and Madars Virza have been working with folks from Johns Hopkins, Technion and Tel Aviv University on Zerocash, a system that uses a concept called “zero-knowledge proofs” to ensure that no information about any payment is ever leaked.

Every time you buy something with a “zerocoin,” you receive a special receipt with no identifying information. When you redeem it, you prove that you paid with a zerocoin, but nobody ever knows which one it was.

Other so-called “altcoins” like Darkcoin have tried to bring better anonymity through hacks like mixing users’ payment information together. But Virza says such approaches only make it moderately harder to figure out who you are. “How much mixing is enough to protect a one-time purchase from a new merchant, or recurring gas bill payments that happen the same time each month?,” he asks.