The rise of Darkcoin

Wednesday 28 May 2014

It has been the talk of the crypto world: the rise of Darkcoin. This past week Darkcoin (symbol DRK) essentially doubled in price, going from just about 0.015 BTC on Wednesday to around 0.028 BTC per coin on Monday. Mike Ward takes a look at why Darkcoin is on the rise.

Is this yet another pump-and-dump scheme? Was there a big event, like perhaps the deployment of new Darkcoin ATMs? Maybe a large capital infusion by investors? High praise lavished on Darkcoin by well respected thought leaders?

As you might suspect, none of the above happened last week. To truly understand the ascendancy of this token, we need only look at its core features but first, let's distinguish between the short term, extreme market volatility and the longer term trends behind this coin. 

Darkcoin Market Cap

Coinmarket Cap: Darkcoin Market Capitalisation

The rise of Darkcoin

On Monday there were some technical issues that led to confusion in the mining community, and delisting from some exchanges. A hard fork was needed, and there was some uncertainty amongst the miners as to which chain they were supposed to be on. End users needed to update their wallet software, causing some delays in transactions on the network. Some exchanges were noticing big delays verifying transactions due to some people being on the wrong chain. All this in a market where there was already heated debate related to the rapid rise in price.

For some, it was a time to panic and for many, the longer term trends look just as uncertain. This is a rapidly evolving creature, unlike the relatively stable bitcoin codebase, and it is chocked full of new, barely vetted implementations of gee-whiz features. Disclaimer: take this discussion with a few thousand grains of salt, and weigh investment decisions against the substantial risks.

Indeed the unconventional feature set, potentially replete with bugs (as much innovative software is) represents a significant risk to investors at this point. It's far too early for the smart investors to dip more than a toe in the choppy, shark-infested waters.

Speculators on the other hand thrive in times of uncertainty, provided there is sufficient risk to allow for a large potential upside. But the speculator community seems to be vacillating between heady enthusiasm and sheer panic. This community is creating considerable churn in the market, leading to trading volumes that surpassed all except bitcoin itself. Monday, for example, saw Darkcoin making up nearly 15% of the trading volume of the entire crypto currency market in dollar terms. Quite a bit of volatility has been created by the schizophrenic, day-trader mentality, so pervasive in the altcoin space. But the long term bulls remain undaunted. They are optimistic based upon the mindset of the Darkcoin dev team, who have shown a willingness to adopt innovative new features and the ability to pull off these feats of coding magic. This has been the quiet driver behind the longer term uptrend.

Darksend and the algorithm

DarkcoinThere are several unorthodox features in Darkcoin, including a significantly better, ASIC-resistant Proof of Work algorithm called X11, and an improved difficulty retargeting algorithm called DarkGravityWave. But one feature in particular is responsible for the sustained interest in Darkcoin and that is their Darksend technology.

Currently Darkcoin is using Darksend, a variant of Greg Maxwell's Coinjoin idea, to provide substantial anonymity to users. Darksend has made some improvements to the original idea, like using all inputs of the same size, i.e. 1DRK, 10DRK, 100DRK, 1000DRK, etc. Outputs of various sizes are allowed too, so long as users' outputs total up to the input amount.

Masternodes are the name for the node in charge of the operation. They are chosen by a deterministic algorithm which will supposedly choose at random. This master node will coordinate all communications and select which transactions get included. It is different, and therein lie the reasons for both optimism and caution.

The Anonymity Factor

The masternodes in Darksend would seem to be the prime vector for attack, and the developers have taken great care to try to insulate these linchpins of their scheme from those who certainly will try to compromise the system. From a non-technical point of view the core team certainly appears eager to do whatever it takes to bring commercial-grade anonymity to the users. Their primary idealogical competitors are the folks at Zerocash, who have what can only be described as a military-grade strategy which forgoes the sort of cat and mouse games that Coinjoin and friends play. The strongest anonymity known comes from seriously hardcore math that is well beyond the grasp of mere mortals.

So why doesn’t everyone just use the solution put forth by Zerocash? One reason is because it requires its “zero-knowledge proofs" to be inserted into the blockchain. Although they are only around 344 bytes per transaction, this strategy gives rise to fear of that old Sword of Damocles known as blockchain bloat. The latent threat of bloated chains must be solved at some point by bitcoin as well, although it may not pose a real danger at the moment.

Another reason for not implementing the Zerocash technique is just how difficult it is to understand the underlying math. If it is broken, that fact may not be obvious for a long time due to the relatively small number of people who understand how this works, and could render it completely compromised until such time as the hole is discovered.

The takeaway here is that the interest in Darkcoin is driven by a fundamental demand in the market for technologies providing anonymity, or something very close to it. Validating that demand is an important step forward, encouraging all future altcoins and metacoins to step up their games. The freedom to “be your own bank” that blockchain technologies promise to deliver must allow us to control access to information about how and where we spend our money.

Mike Ward

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