What are Privacy Coins?

Intro to cryptocurrency

If you've been living under a rock and don't know what cryptocurrency is, then let us enlighten you with a quick debrief. Here are the main things you need to know about cryptocurrency before we can answer “What are privacy coins?”:

• Cryptocurrency is a digital or virtual currency that uses cryptography for security.
• It operates independently of a central bank or financial institution.
• Transactions take place on the “blockchain” — a public digital ledger.
• Transactions are validated by a network of independent and distributed nodes.
• The network of nodes is also decentralized, meaning that it is not controlled by any government or financial institution, and is not constrained by any one legal jurisdiction.
• Once a transaction has been written to the blockchain, it's final and cannot be reversed.
• Cryptocurrency transactions happen peer-to-peer (P2P) without an intermediary such as a bank or financial institution.

According to CoinMarketCap there are now almost 23,000 cryptocurrencies on the market. This is pretty impressive when you consider that Bitcoin, the first cryptocurrency, was only introduced in 2009.

Over the years, digital currencies have become more mainstream and can now be used for a variety of purposes. They can be bought and sold on cryptocurrency exchanges, used for trading, investment, and speculation, or used to purchase many goods and services.

Is crypto anonymous?

No. There is a general misconception that cryptocurrency is anonymous. While cryptocurrencies are harder to track than regular electronic payments, they are not inherently anonymous.

What they are, however, is “pseudonymous”.

READ MORE: Online Anonymity Under Attack as The Times Scraps Pseudonyms

You don't suddenly become invisible when using crypto, you just have a new “crypto identity” in the form of a wallet address from which you can send and receive cryptocurrency and digital assets such as NFTs.

A wallet address is a string of random letters and numbers. For example, Bitcoin's genius (the very first) address was: 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa.

A wallet address is completely unique to you— in that respect, it's kind of like a bank account number. But unlike regular banking, anyone can see your public wallet address.

As a digital public ledger, the blockchain is actually much more transparent than regular banking systems.

Every cryptocurrency transaction is recorded on its respective blockchain and can be viewed by anyone. This means that any transaction made to or from a specific wallet is publicly visible.

For example, you can watch Bitcoin transactions happen in real-time using blockchain explorers. You can see the seller or sender's address, the buyer or receiver's address, the time of the transaction, and the amount in both crypto terms and its dollar equivalent.

Source: Blockchain.com

You can even click on an individual address and see how many times it has transacted on that blockchain, the total value of received and sent crypto, and the current value of that address.

Source: Blockchain.com

While wallet addresses don't contain personally identifiable information such as a name or address, they can potentially be linked to a real-world identity through various methods, such as analyzing transaction patterns or tracing the IP address associated with the wallet.

Crypto exchanges also represent a weak link in the anonymity chain since many of them have a “know your customer,” or KYC identification process when signing up for an account. If law enforcement or government powers come knocking, an exchange could hand over information to connect a wallet with a specific individual.

If a crypto exchange is hacked or there is a data breach, again, identification could be possible, as well as putting their cryptocurrency and assets at risk.

It's also worth noting that the anonymity or privacy of crypto can also be compromised if users don't take appropriate measures to protect their wallets. For example, if a user links their real name or address to a wallet address, or if they use a wallet that's not secure or properly configured.

READ MORE: Online Anonymity is Important. Here's How to Protect it

What are privacy coins?

On the surface, privacy coins appear to be much like other cryptocurrencies but they have additional and advanced privacy features that set them apart.

Also referred to as “private coins” or “anonymous coins”, privacy coins hide certain transaction data that could be used to link a transaction to an individual. This includes the details seen in the image above, ie. the transaction data, the address activity, and the address balance.

With privacy-focused coins, the only people who will know details of a particular transaction will the be sender and the receiver. Hiding transaction and address activity from the public view means users are able to maintain a higher level of anonymity.

How do privacy coins work?

Privacy coins work in slightly different ways depending on the protocol and what cryptographic techniques they implement. That said, there are three main privacy technologies commonly used, namely ring signatures, stealth addresses, and zero-knowledge proofs.

Let's take a closer look at each.

Ring Signatures

A ring signature is a cryptographic protocol that allows a user to sign a message anonymously on behalf of a group. In the context of top privacy coins, a ring signature is used to hide the identity of the sender by creating a group of users and allowing any member of the group to sign the transaction. The signature does not reveal which member of the group actually signed the transaction, making it difficult for outsiders to trace the transaction back to the sender. This is different from traditional digital signatures, which can be traced back to a specific user.

Stealth addresses

A stealth address is a one-time address that is generated by the recipient of a transaction. When the sender wants to send coins to the recipient, they use the stealth address instead of the recipient's actual address. This makes it difficult for anyone other than the sender and the recipient to know who received the coins.

Zero-knowledge proofs

Zero-knowledge proofs (ZKPs) are another important technology used by some private coins, such as Zcash.

In cryptography, a proof is a mathematical statement that shows that a certain fact is true. A zero-knowledge proof is a special type of proof that allows one party to prove to another party that they know a certain piece of information, without revealing any details about the information itself.

In the context of our anonymous coins, zero-knowledge proofs are used to prove that a transaction is valid without revealing any information about the inputs or outputs of that transaction. This allows users to verify that a transaction is valid without revealing the details of it to the rest of the network.

For example, in a Zcash transaction, the sender uses a ZKP to prove that they have enough coins to send in the transaction without revealing the amount of those coins or which inputs they are using. Similarly, the recipient can use a ZKP to prove that they received the coins without revealing their address.

Pros and cons of privacy coins

There are several pros and cons to using the top privacy coins. Let's check them out.

Pros

Private coins have the same main benefit as regular cryptocurrencies. They are decentralized meaning they are not controlled by any one entity, government, or financial institution.

But the most obvious benefit of these particular coins is the higher degree of privacy and anonymity offered compared to other cryptocurrencies. Details of transactions, amounts, wallet balances, as well as wallet addresses can all be protected.

Top privacy coins with their advanced cryptographic techniques and privacy features also help to protect against hacking and other security threats.

The pros of privacy coins

• Decentralized
• Enhanced privacy and anonymity
• Improved security

Cons

Privacy-centered coins can be more complex to use and understand compared to other cryptocurrencies, requiring users to have a greater technical understanding of the underlying technology.

But the main issue with them actually comes down to their greatest strength... their privacy and anonymity.

With the ability to hide transaction details and identity, privacy coins can attract some dodgy users. Privacy coins are often the cryptocurrency of choice on the dark web and for doing dark deeds. Because of this, they are subject to greater regulatory scrutiny.

Governments and law enforcement are constantly trying to reign in the use of crypto-based privacy tools due to concerns about their potential use in illegal activities such as money laundering and financing terrorism.

It's also why these privacy-focused cryptocurrencies are illegal in some countries. Dubai has recently banned privacy coins, joining the likes of Japan, South Korea, and Australia.

Their additional legal issues have also meant limited adoption which makes using them for everyday transactions more difficult.

It can also mean they have lower liquidity and are harder to buy or sell on cryptocurrency exchanges. In fact, some cryptocurrency exchanges won't allow the sale or trade of even the top privacy coins on their platforms at all.

In 2022, Huobi, one of China's biggest cryptocurrency exchanges, delisted seven privacy coins.

At the end of 2022, a leaked draft of an anti-money laundering bill showed that the European Union was also proposing to ban banks, credit institutions, and crypto-asset providers from dealing in privacy coins.

Cons of privacy coins

• Complexity
• Greater regulatory scrutiny
• Not legal everywhere
• Limited adoption
• Reduced liquidity
• Delisted on some exchanges

Who uses privacy crypto coins?

Privacy coins are used by a diverse range of individuals and entities. Some of the main groups that use privacy coins include:

Cryptocurrency enthusiasts: Individuals who are passionate about the underlying technology behind cryptocurrencies often favor private cryptocurrencies. The additional cryptography tech used just makes them all the more interesting!

Investors and traders: Privacy coins can be used as an investment or trading vehicle, as they offer the potential for increased privacy and security compared to other cryptocurrencies.

Privacy-focused individuals: Anonymous coins are popular among privacy nuts— individuals concerned about the potential misuse of their personal data or who may be looking for ways to protect their privacy online.

Businesses and organizations: Different businesses and organizations may choose to use privacy coins to protect sensitive financial information.

Individuals living in countries with oppressive regimes: For individuals living in countries with oppressive regimes, private crypto coins can help them evade government monitoring of financial transactions.

Top privacy coins

When you search for the top privacy coins there are three that will always pop up. Based on market capitalization and popularity they are Monero, Zcash, and Dash. Here's a brief description of each:

Monero (XMR)

Monero is a privacy-focused cryptocurrency launched in April 2014 and based on the CryptoNote protocol. Monero uses ring signatures, stealth addresses, and an additional technology called Ring Confidential Transactions (RingTC) to enhance users' privacy and anonymity.

Monero transactions are untraceable and “unlinkable”. When sending Monero coins to a person's public address, you actually send the funds to a randomly and newly created one-time destination address. Your public crypto wallet address is also never publicly visible, instead, a 'stealth address' is recorded.

It also uses a system of transaction mixing. This is when a sender randomly chooses several other users' funds to also appear in the transaction as the possible source of the funds.

Zcash (ZEC)

Launched in October 2016, Zcash is a code fork of the Bitcoin protocol but with its own blockchain and currency token (ZEC).

Zcash also uses its own version of zero-knowledge proofs called “Zero-Knowledge Succinct Non-Interactive Argument of Knowledge,” (or zk-SNARKs for short) to enhance privacy and anonymity.

Zcash is a little different from the other top privacy coins in that it allows users to choose between transparent and shielded transactions. The option is to balance privacy with regulatory compliance.

Transparent transactions are similar to Bitcoin and will show transaction details. Shielded transactions hide the transaction amount, sender, and receiver, plus other background transaction data, known as the “transaction graph”, which they claim Monero doesn't hide.

This option of transparent and shielded means Zcash is more widely accepted, even on exchanges with harsh lines regarding privacy coins. However, there are only a handful of exchanges that accepted the “shielded transactions”.

You can check which exchanges offer shielded support here.

Dash (DASH)

Launched in January 2014 as a fork of Litecoin (LTC), Dash was specifically designed to address Bitcoin's issues of slow transaction speed and lack of privacy. It achieves this with its two systems: InstantSend and PrivateSend.

InstantSend is exactly what it sounds like, instant transaction. According to the Dash website, the transaction speed is just 1 second.

Offered as an option and not as a default, PrivateSend is a decentralized trustless mixing strategy that allows users to transact privately without leaving a traceable record. A transaction is sent to Dash Master Nodes where it is mixed with transactions of other users, making it much more difficult to trace the transaction's path even on the open ledger.

Are privacy coins for you?

Now we've asked and answered the question of “What are privacy coins?”, described how they work, weighed up the pros and cons, and given you the top privacy coins on the market, it's time to weigh up if they are the right cryptocurrency type for you. As with any investment, it's important for individuals to carefully research and understand the risks before making any decisions. Just remember, although privacy coins can offer a higher degree of privacy and security, they may not be completely anonymous.

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