Darkcoin: A cryptocurrency with more anonymity

Since the release of Bitcoin in 2009, open-source cryptocurrencies have had a substantial economic impact on the world. The most popular ones have millions and, sometimes, billions of dollars worth of currency in circulation. While cryptocurrencies provide a digital form of cash transactions, they have also raised the ire of those who argue that they sustain online black markets. A new currency, Darkcoin, which had an open-source release in September, has a distinction from its competitors in its focus on making transactions untraceable.

The project was announced in January 2014, but was only released as open source in September, when project members deemed the technology ready for mainstream use. Based on Bitcoin, Darkcoin seeks to improve upon that foundation, particularly with regard to anonymity. As the project notes: "With Bitcoin, transactions are published to the blockchain and you can prove [who] made them, but with Darkcoin the anonymization technology makes it impossible to trace them."

For those unfamiliar with how Bitcoin transactions operate, here's a quick primer. When trying to create a new digital cash system from scratch, the same problem that the music and movie industry have faced crops up: how to stop computers from copying valuable bits? Bitcoin solves this problem by incorporating a public ledger in its code. Everyone who wants to use Bitcoin has to download a copy of the complete database of all the Bitcoin transactions ever made, and keep it up-to-date. This database is known as the blockchain.

To give a financial incentive for individuals to provide the computing infrastructure necessary to keep the database and Bitcoin network working, and to provide a controlled means to increase the number of Bitcoins in circulation to deal with inflation, the ability to "mine" Bitcoins is built into the software. Those who provide nodes to help sustain the Bitcoin network also devote resources to brute force instances of an automatically-generated cryptography problem. This problem is a cryptographic classic: the Byzantine Generals' Problem. The first miner to solve an instance of this problem is awarded some free Bitcoins from a combination of automatic transaction fees from across the Bitcoin network, along with a set number of Bitcoins (presently, twenty-five, though that will diminish, eventually to zero, over time). The code is designed to adapt the difficulty of the cryptographical problem to the computational power of the network so that, on average, the problem will be solved every ten minutes.

The blockchain leads to a privacy problem: while a paper cash transaction is not easily traceable, every Bitcoin transaction is publicly recorded. To mitigate this problem, transactions are recorded using pseudonyms (Bitcoin addresses); users can generate as many different addresses as they want. For some, this approach is insufficient; tracing the transaction history in the blockchain or other techniques may be able to deanonymize Bitcoin owners.

Darkcoin's claimed innovation to address this issue is its mixing software named DarkSend, which uses decentralized "masternodes" in a fashion somewhat similar to onion routing: "Obfuscation is achieved by using network nodes in order to break up and reroute the flow of money in a way that is hard to track down". Masternodes are given a financial incentive to operate, but must hold an initial minimum amount of Darkcoin to participate, to try to deter surveillance:

DarkSend also pools Darkcoin before completing transactions, to make it much less clear where payments originated from. Basically, instead of paying someone directly, one pays into a pool, managed by the masternodes. When that pool grows large enough, the pool then pays the recipients, making it difficult to trace the source of the payments. As stated in the Darkcoin FAQ, masternodes never actually hold the Darkcoin from the pool, so they cannot steal any. Payments from pools are all equal sums to further obfuscate the source. That is, buying something for ten Darkcoin could contribute to a pool that, when it reached 1000 Darkcoin, would complete 100 different transactions each for ten Darkcoin. In the project's words:

Security researcher Kristov Atlas's detailed analysis [PDF] of DarkSend offers an analogy to help explain it: "Imagine you're flying in a helicopter trying to track a red car on the highway, and it passes under a bridge. If two red cars emerge on the other side of the bridge, it's ambiguous which one you want to follow" (page 4). Atlas's article is worth the read for anyone interested in cryptocurrency security. He breaks down which types of entities take part in DarkSend, what role they play, and how that role may or may not compromise transactional anonymity. For example, masternodes, which play a critical role in mixing Darkcoin before completing transactions, are also a potential avenue for compromising user privacy: "Malicious Masternodes can record the input and output relationships for any transaction they are chosen to orchestrate" (page 10).

The actively developed code is available under the X11 license at Darkcoin's GitHub repository. Discussion happens on the project's official forums and on a dedicated subreddit. The project leads are ambitious and appear to have a semi-academic approach with frequent releases of white papers. A recent paper [PDF] describes "transaction locking": a proposed means "to enable instant validation of payments without having to wait for blockchain confirmation". This would make Darkcoin transactions competitive with credit cards for speed of validation; another improvement over Bitcoin. A message from the project's official Twitter account states that this technology will be coming soon to Darkcoin.

No matter how well-done, a cryptocurrency is merely of academic value if no vendors will accept it as payment. With many merchants offering goods and services in exchange for Darkcoin, this appears not to be an issue for the currency. A Canadian vineyard got the ball rolling this past May, when it announced that it will "be the first retail business to accept DarkCoin". The official Darkcoin forums have a section where vendors can advertise that they accept Darkcoin. The list is diverse: there's a law office in Brazil, a VPN service based in Belize, a VHS-to-digital conversion service in Texas, and many more. A merchant directory lists several other vendors, including an auction site, a computer hardware vendor, a board game company, and a house planner.

With Darkcoin's focus on online privacy, certain questionable or illegal activities have capitalized on the new currency. Gambling, drugs, and guns all appear to be available to those who hold Darkcoin. All of these black markets are hidden services on Tor to avoid law enforcement actions. Nonetheless, there are plenty of legitimate uses for Darkcoin. With a focus on privacy, ambition from its developers to break new technical ground, and strong interest from vendors, Darkcoin will likely continue to make an impact in cryptocurrency technology innovation.