Zero Knowledge Contingent Payment

Its possible to make a transaction in bitcoin that requires the spender to provide a "secret" which hashes to a specified value. And example is the 0.01 output here with the SHA256 opcode: https://blockexplorer.com/tx/9969603dca74d14d29d1d5f56b94c7872551607f8c2d6837ab9715c60721b50e

Used directly, like in this example, this is insecure. Once you've published the spending transaction a trouble making miner could just drop your transaction and use the password in a new transaction that pays him instead.

So— the advice is that you shouldn't use a password alone, you should require a signature and a password. But then what is the use of that?

There are a couple uses but I'll give an example here of one of the more impressive uses:

Zero knowledge contingent payments

Let H() be a complicated computer program. For some H(X)=Y you want to know some X that gives you a particular Y.

Perhaps H() is a password hashing algorithm and you're looking for the password that gives you a particular hash in order to crack it. Or perhaps H() is a complicated program that decides if a image is one you would find beautiful. We'll use password cracking here, but this works for all programs.

Say I happen to _know_ some X that answers your question... and I'd like to sell it to you. But we don't trust each other at all, and because we're computer geeks we have no friends who can act as trusted mediators. Can we make this exchange using bitcoin with zero trust? Yes.

A zero-knowledge proof lets someone prove a mathematical fact to another person without teaching them anything about the fact itself. It has been proven that you can convert any computer program into a proof. So, using a zero-knowledge proof I could prove to you that I know some X such that H(X)=Y ... which is helpful but it's not enough because you could pay me and I could not tell you the answer (or I could tell you and then you don't pay). Here is where the password locked transactions come in.

First I encrypt X with random key K, Ex=AES(X,K). then I construct the program:

Ex=AES(X,K);Hk=SHA256(K);H(UNAES(Ex,K))+Ex+Hk==Y+Ex+Hk

and I convert that program into a zero knowledge proof. Externally to bitcoin I tell you Ex,Hk and then prove the above statement to be true.

You then form a bitcoin payment which requires both my public key and password K. In order to redeem this transaction I must disclose K, the key you need to decrypt Ex and give you your solution. So neither of us can cheat, so no trust is required.

The reason this isn't something people are using yet is because while the academics have proven it to be possible actually converting complicated programs like compositions of ciphers and hash-functions into zero-knowledge proofs is apparently not something anyone has figured out how to do practically.