This is Huge: Gold 2.0 - Can code and competition build a better Bitcoin?

Zerocoin and Ripple present two ways to improve the ailing crypto-currency

Bitcoin has had a wild ride these past few months. The stateless digital currency’s price has soared to new heights only to plunge back down to earth at less than half its previous value. As the price of gold takes a nose dive of its own, some serious economists have risen to Bitcoin’s defense as true believers urge traders to hang on. Others argue the electronic money scheme is either a dangerous fad, a form of Dadaist art, or more simply, not money at all. But even as the debate rages on, one thing that's fostering hope for Bitcoin as a stable store of value is the fact that, unlike a gold bar or a dollar bill, new code and alternative currencies being built alongside Bitcoin might help change it for the better.

Since Bitcoin is open source, many of these solutions potentially lie within its own thriving developer community. Take for example Bitcoin’s most advertised feature, its supposed anonymity. Everyone from the mainstream media to Wikileaks to the now-disbanded hacker collective LulzSec has trumpeted Bitcoin as "anonymous." But the truth is that researchers have long since proven it's anything but — since every bitcoin transaction appears on a public ledger distributed to everyone in the network (called the "block chain"), tracking bitcoins back to individuals is often trivial.

Zerocoin promises true anonymity by giving Bitcoin its own built-in money laundering system

One team of researchers is saying they might be able to fix that. Developed by cryptographers at Johns Hopkins University, Zerocoin is being proposed as a kind of "plugin" for Bitcoin clients that promises true anonymity by essentially giving the Bitcoin network its own built-in money laundering system. Bitcoin laundries normally work by taking your coins and mixing them up with other peoples’ in a big pool. But being as how they're controlled by third parties, using a laundry means trusting your bitcoins with often-shady intermediaries like Silk Road, the notorious darknet bazaar where you can find everything from black tar heroin to contract killers.

 

That's not true with Zerocoin, since the laundry would be built into the Bitcoin network itself by standardizing code across client software. If adopted, the new functionality would allow you to add a transaction to Bitcoin's block chain that turns a bitcoin into a zerocoin — a “flipped” bitcoin, if you will. Then, when you redeem (“spend”) your zerocoins, your client scans the block chain and returns a totally different set of coins, making it impossible to determine who they really came from.

The special sauce is a zero-knowledge proof, a statement used to verify a piece of secret information without giving away the secret in the process. This makes it so that if someone looks at the block chain, they’ll be able to see that you minted a zerocoin at some point, but there will be no way to tell which one you're redeeming.

It's a promising solution that tackles a crucial missing piece in the narrative of bitcoins as "crypto-anarchist cash." But still unaddressed is the even bigger problem of liquidity — the fact that buying and trading bitcoins in the first place is still such a huge pain. It’s for this reason that some economists believe the future of Bitcoin is not an upgrade to the currency itself, but a new generation of digital currencies that take the best of Bitcoin while avoiding its weaknesses.

To that end, consider Ripple, another digital money scheme with its own transaction network and a shared public ledger very similar to Bitcoin's. Although Ripple uses its own currency (known as Ripples or XRP), the people behind it — including Jed McCaleb, creator of the P2P software eDonkey2000 and Bitcoin exchange Mt. Gox — are nonetheless directly appealing to Bitcoin users. - Read more here: http://www.theverge.com/2013/4/23/4252808/can-zerocoin-and-ripple-build-a-better-bitcoin

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