The Zerocoin people are going to release a library in a couple days that any Bitcoin protocol-based currency can implement. The problem with Bitcoin implementing it directly is that it's very cumbersome - transactions are large and verifying them is CPU intensive. The result would be that Bitcoin would have a much harder time staying decentralized while it scales up. However, alt-coins will undoubtedly implement it, and compete with Bitcoin for market share. In anticipation of this, I'd like to describe a way that a Zerocoin alt-chain could be implemented that would reinforce Bitcoin, rather than destabilize it, as well as the incentives that the existence of Zerocoin alt-chains creates for Bitcoin miners.
Symbiotic Zerocoin alt-chain:Zerocoin could be implemented on an alt-chain that's merge-mined on the Bitcoin blockchain, where new currency units are allowed to be created (perhaps at a limited rate) by anyone who has provably destroyed an equivalent number of bitcoins (using OP_RETURN), and mining the Zerocoin chain is incentivized by transaction fees and the value that a strong
symbiotic Zerocoin chain would add to Bitcoin. The market would determine the amount of bitcoins that move over to the Zerocoin chain; if the value of a zerocoin rises much beyond that of a bitcoin, then people would tend to turn bitcoins into zerocoins and profit off of the difference.
By functioning symbiotically, the bitcoin unit of account would be reinforced instead of destabilized - the Zerocoin chain would act like "a rising tide that lifts all boats" instead of only its own at the expense of bitcoiners'. Zerocoin mining revenues would go toward strengthening the combined mining network. Users wouldn't have to speculate on how many of their bitcoins they need to trade for zerocoins, and at what price, in order to retain their purchasing power. If Zerocoin turns out to have seriously damaging bugs or scalability issues, then conservative users that keep their long-term value parked on the Bitcoin chain won't have to worry about going down with the ship. This would also set a nice precedent that new coins can be adopted without threatening the stability of their predecessors.
Incentives faced by Bitcoin miners:If the demand for a Zerocoin chain is large, then Bitcoin miners collectively have an equally large incentive to provide one in order to avoid losing market share, and they are in a position to provide by far the most secure one. They could mine an alt-chain that competes with Bitcoin, but I hope they see that the correct collective strategy (
https://en.wikipedia.org/wiki/Nash_equilibrium) is to mine a symbiotic one like I described above,
and only that one. By mining a competing one, a miner might earn more immediate inflation revenues (though
profitability will in any case be driven down to a minimum in the long run due to stiff mining competition), but they would do so by reducing the utility of Bitcoin as a store of value, and thus cryptocurrencies in general: if the flagship one can't preserve this functionality in the face of new innovations, then people will recognize that likely none of them will be able to. In turn they would detract from the future value of their own hardware.
To get a sense of the incentive of a miner to preserve the store of value function, consider that a single person storing $100,000 in value for a year contributes to the overall valuation of the currency during that time as much as
a thousand people that casually use it for transactions and only keep on average $100 stored in it at any given time. It thus strikes me as potentially important enough of an issue in some cases for miners to actively discourage the merged-mining of alt-chains that detract from Bitcoin's store of value functionality, by refusing to build on blocks that do this, and by merged-mining symbiotic alternatives.
Bitcoin miners who mine the Zerocoin chain would also have to expect to face scrutiny by government agencies. I think for the most part the Bitcoin community is not an insecure community and is okay with that possibility but it should be you mine at your own risk here. If there is a situation where someone does something wrong then it's like running the Tor node.
Make both the risks and incentives known to miners. List them out. List out how the good guys and bad guys can use Zerocoin. But do not expect the media to get this right. The community must explain this to the media properly with a press kit.