Cryptocurrencies aim to shift the power and control assumed by corporations and government entities to the people.
In February 2020, security expert and crypto mouthpiece John McAfee claimed that adoption for privacy coins is inevitable. He has backed his statement by associating the criminal activities with privacy coins and noted that historically, criminals are always the first to experiment with new technologies before the government catches up with them, in order to adapt to the new technology, leading to mass adoption.
Empowering the financial system as free and transparent, cryptocurrencies are created with the hope to regain civil liberties through technological means. They are built onto the blockchain, a technology that has encryption features allowing high degrees of security and privacy. However, with great power comes great responsibility. Regrettably they have become a natural attraction for criminals and bad actors, which in turn became the main narrative against Bitcoin and other cryptocurrencies in general. But more often than not, embracing privacy and anonymity simply means that users are redeeming the rights to have absolute control over personal identity and privacy. Therefore, cryptocurrencies are instrumental in exercising one’s rights to privacy for legitimate purposes of course.
In recent years, privacy coins are controversial in the industry. While they are designed to conceal users’ data and transactions, the technology is making things more difficult for major corporations and governments in tracking insights of the people. As a result, these entities often discredit privacy coins as a form of illegal tool only for criminal activities. But things are far beyond the ‘truth’ for the technology that enables everyone in their pursuit of financial freedom from a state or central body.
Mitigating Transparency on the Blockchain
Semi-anonymous cryptocurrencies such as Bitcoin are built on transparent and distributed ledgers that makes it possible to identify transaction activity for each public address. This partly explains the emergence of privacy coins, as they could mitigate the level of transparency and protect the transactional information of the sender and recipients.
Monero and Zcash are amongst the most popular privacy coins in the market today, both in terms of market capitalisation and the complex cryptography involved in achieving the privacy required, using different algorithms. In this article, we will be sharing a summary of some of the most popular privacy coins that are slowly gaining traction in the market.
A brief glance at CoinMarketCap shows us the most popular privacy coin on the chart. It is Monero (Ticker: XMR), a well-celebrated blockchain launched in April 2014. Monero means money in Esperanto and was originally a fork of Bytecoin, another private and untraceable cryptocurrency. It uses CryptoNote technology, Ring Signatures, Ring Confidential Transactions and Stealth addresses to maintain the privacy of its users. Like Bitcoin, Monero also involves public addresses. However, the detailed amount held by users is not connected to this public address. The opaqueness in the Monero blockchain means that its inputs and outputs cannot be traced back to the origin (or source) addresses.
Initially launched as Zerocash in 2014, ZCash (Ticker: ZEC) is another popular privacy coin that is the first widespread implementation of Zerocash protocol and is thus based on zK-SNARKs, a form of ‘Zero Knowledge Proofs’ which enable one party to prove that it has knowledge on something, without having to expose it. It is often described as Bitcoin with a privacy layer. It uses much of Bitcoin’s source code, in addition to the privacy features that are applied for encryption of payment information which forms the basis of ‘Shielded Transactions’
Formerly known as Darkcoin, Dash (DASH) was also founded in 2014 like ZCash, and is a fork of Bitcoin. It aims to offer quicker and improved privacy in transactions that Bitcoin could not deliver. It uses a two-tier architecture for its blockchain - the first tier consists of miners who secure the ecosystem and write transactions to the network, while the second tier is made up of masternodes, which works on decentralized governance, instant and private transactions. It also has a ‘PrivateSend’ option which can be selected for more anonymity in the transaction.
However this controversial privacy feature, when compared with ZCash and Monero’s privacy protocols, is debatable whether Dash should be categorized as a privacy coin. It has also received flak for being not particularly user-friendly and is plagued with bugs and errors, making it susceptible to compromise. As a result, many critics view Dash as less of a privacy coin, but more like Bitcoin that offers privacy through mixing.
The final and newest privacy coin on our list is Zcoin (XZC). It was created in 2016 by Poramin Insom and team, which utilizes the Zerocoin Protocol. This protocol employs a well-researched and battle-tested technology called RSA factoring, and was originally intended to be an extension of Bitcoin, which supposedly could facilitate untraceable transactions. Therefore, Zcoin has the ability for anonymous transactions in a unique and scalable approach. With Zcoin, users can preserve the fungibility and privacy of one’s transaction.
Main Takeaway for Privacy Coins
In order to qualify as a torchbearer of privacy and anonymity, there are three assessable metrics available to determine the eligibility as the titular cryptocurrency - Privacy, Fungibility and Decentralization. With proper privacy features in place, no amount of coins that an individual owns, sends and receives will be observable, traceable or linkable by way of public transaction records on the blockchain. It has to be fungible as well such that every coin is worth the same value and is thus mutually interchangeable. No coin could risk potential blacklisting or debasement due to deprecating transaction history. Lastly, all nodes should have equal power and control; no nodes should have more influence than others, i.e. master nodes. This brings us to the decentralised definition of the currency, where it is not created, maintained nor represented by any one person or company, i.e. a central authority.
So, Are Privacy Coins Really Private?
Privacy coins are a reaction to the realization that bitcoin isn’t private at all. Thus cryptocurrencies like Monero and ZCash have been gaining traction over the last few years. However, according to Florian Tramer, a cryptography researcher at Stanford, privacy remains tricky with these privacy coins even with the various cryptographic measures in place.
Tramer reported a safety loophole to the ZCash and Monero team in September 2019. He and his colleagues have created so-called side channel attacks that let remote adversaries bypass these protections between private wallets and public-faced networks. Since the transaction details are encrypted, a wallet needs to test whether or not any transaction that it sees was intended for it. His team based their attack on the observation that depending on the response to that problem, wallets perform specific cryptographic checks. Intruders can learn more by paying attention to certain subtle timing and behavioral variations. Using the techniques developed by him, an intruder might discover the payee in the network for any anonymous transaction, and locate the IP address of a computer holding the private keys for a public address.
These vulnerabilities were quickly fixed and patched as soon as the two teams were informed of the security issue. Although those problems were fixed for now, this incident is a reminder to privacy coin users and the wider community that while privacy-centric coins have a solid cryptographical foundation, the eventual success of privacy and anonymity boils down to how they’re used in practice, and the chances that future and newer issues are detected. Because of that, the uncertainty of privacy coins remain, and majority of cryptocurrency users are still inclined to using cryptocurrencies with higher liquidity such as Bitcoin.
Is there a future for Privacy Coins?
The list of privacy coins is not exhaustive, and in the future there will be newer and improved variants of privacy-focused cryptocurrencies. It remains to be seen for the possible implications by using privacy coins. Having the ability to execute untraceable transactions provides an ideal solution for those seeking less disclosure. But at the same time, authorities will undoubtedly want to ensure that such privacy does not exacerbate the already growing problems of money-laundering and other illicit activity that involves cryptocurrencies, since privacy coins like Monero are increasingly becoming the alternative to Bitcoin as the preferred choice amongst bad actors.
Therefore, it seems unlikely that authorities will be scrutinizing privacy coins in the foreseeable future. But in the event that users are taking the safer route by using Bitcoin, there are various means such as Bitcoin Mixing with trusted Mixers like MyCryptoMixer, where users can maintain sufficient privacy while trading the new asset class.