One of the primary appeals of cryptocurrency has been the transparency and decentralization they allow for. This appetite has led to a range of technologies popping up to cater to user privacy – one of the foremost of which being privacy coins. Traditional cryptocurrencies have still been able to be traced by the prying eyes of governments, corporations, and malicious actors. The most popular asset among these is Monero coins. In this article, we are going to be talking about how these technologies work and the benefits they offer, in addition to the challenges such coins will face going forward.
How privacy coins work
Whereas old-fashioned cryptocurrencies like Bitcoin can be traced on a public blockchain, privacy coins employ advanced cryptographic techniques to obfuscate these details and ensure that the sender’s identity and the transaction amounts remain private. The BTC to XMR exchange process will work via many centralized exchanges and non-custodial platforms.
In most public blockchains, every transaction is visible to anyone who looks at the blockchain, including the sender, recipient, and transaction amount. In contrast, privacy coins use various methods to shield these details, allowing only the two relevant parties to be aware of the transaction data.
Not all privacy coins offer full anonymity by default. Some allow users to selectively choose which transactions they wish to make private. For instance, with ZCash, users can opt for transparent transactions or obfuscated transactions, as needed. This renders the trader’s financial activity anonymous in a way that traditional-style cryptocurrencies do not.
Privacy features and technologies
Let’s take a look at how some of these fascinating breakthrough technologies allow investors to operate outside the oversight of Big Brother. Not only do users manage to avoid being surveilled, but they also manage to evade exploitation of their data.
Ring signatures
These, a feature at the core of Monero coins, entail transactions signed by a group of users whereas the actual signer is hidden within the group. While it’s recorded that the transaction was signed by one of the group members, who exactly it was is unknown. Hence, the transaction is “ringed” with several possible singers, rendering it difficult to link it to a single one of them. They help ensure that all participants in the ring are equally likely to be the true signer.
Stealth addresses
Commonly used by XMR and ZEC, these are one-time addresses that protect the recipient’s identity. Meanwhile, the actual destination is never publicly revealed and the recipient can later access the funds using a private key. Therefore, no one is able to determine which address the recipient used, as it is not publicly linked to their identity, even when transactions are visible on the blockchain.
Zero-knowledge proofs (ZKPs)
These are a sophisticated cryptographic technique that enables one party to prove to another party that they know a certain piece of information, such as the validity of the transaction in the sender having sufficient funds available, without revealing the information itself. They allow users to prove that a transaction is legitimate without disclosing any other details such as the amount or the parties involved. No sensitive data is revealed where only the necessary validation is visible.
Confidential transactions
These are used in Monero and Bitcoin’s Liquid Network among others. Blockchain stores an encrypted version of the transaction value and the transaction is still validated without revealing the amount being transferred. Thus, third parties cannot see the amount of the transaction, only that it took place.
Coin Mixing / CoinJoin
This mixes multiple transactions together to make it harder to trace where the funds are going and where they originated. Users are pooled into a single transaction to obscure the trajectory of the funds. Forbes recently discussed why coin mixers are frequently appearing in the news.
MimbleWimble
Only the final result of the transaction is stored on the blockchain following the aggregation of transactions, not the individual inputs and outputs themselves. The protocol’s compact nature also helps reduce the data footprint of the blockchain.
Further advantages of privacy coins
So, we are well aware of the primary draws of privacy coins. However, its benefits go beyond that. They also feature:
- Protection against profiling
- Increased fungibility
- Protection from identity theft
Popular privacy coins
There have been several privacy coins over the years that have risen to the top, each gaining popularity in light of the different technologies they use to cater to privacy and anonymity. Here is how they rank:
- Monero (XMR): launched in 2014 as a fork of Bytecoin and rose to prominence in the privacy coin market due to its advanced privacy features. It uses ring signatures to combine the transaction with others to hide which user was the actual sender. Monero uses privacy features by default and all transactions are private, owing in part to the use of one-time addresses for every transaction.
- ZCash (ZEC): Launched in 2016, it’s based on zero-knowledge succinct non-interactive argument of knowledge (zn-SNARK) protocol, enabling private anonymous transactions. These cryptographic proofs allow transactions to be validated without revealing any information. If participants opt for a shielded transaction, the details are encrypted and hidden.
- Dash (DASH): originally Darkcoin in 2014, it is designed for speed in addition to privacy. It uses CoinJoin, combining transactions from multiple users into one. Its InstantSend feature meanwhile allows for near-instant transactions.
- Grin (GRIN): a relatively new asset, focusing on simplicity and privacy using its privacy-oriented blockchain MimbleWimble. This also reduces blockchain bloat by deleting unnecessary data. Grin also doesn’t use traditional addresses. It manages to do so without sacrificing scalability.
- Secret Network: uses secret contracts, keeping the inputs and outputs confidential
- Oasis Network (PIVX): supports confidential DApps and separates consensus and execution into a Consensus Layer and a ParaTime Layer
The dark side of privacy coins
Given all this action taking place without the government’s awareness, they are predictably trying to come down on these coins. This may hamper privacy coins’ widespread adoption.
- Governments are concerned about the use of these coins in facilitating illegal activities like money laundering, tax evasion, and the financing of terrorism, even if most people use them for legitimate reasons. Business Today elaborates on this perspective.
- They are complicated to use
- As a result of government pressure, they have not been fully adopted by the mainstream. Merchants often do not accept them and there are regulatory hurdles impeding businesses and users from incorporating privacy features.
- Scalability issues: as a result of group-based and ringed signatures, transactions tend to be slower than traditional currencies
- The high computational power required for mining can lead to the concentration of mining power in the hands of a few large mining pools
Future of privacy coins
The battle between privacy and regulation will breed both potential and uncertainty. This will be determined largely by the following factors:
- Increased adoption as individuals and businesses continue to prefer privacy in a world where financial surveillance is growing.
- Technology: if privacy coins become more scalable, easier to use, and more accessible, there could be a shift toward mainstream adoption.
- Privacy coins being integrated into decentralized exchanges, lending platforms, and other DeFI apps would be a game-changer
