Privacy guarantees are designed to benefit legitimate users who do not want their financial details made public. There is a concern, as always, that decentralized anonymous payments will facilitate the laundering of ill-gotten funds by criminal users….however barely affects the status quo for criminal users, who already have strong incentives to hide their activity, while it provides notable benefits to legitimate users.
Privacy coins have been hot lately, so our team wanted to put together an article to give everyone an easy way to understand what privacy coins are and how they work.
Why do we need privacy?
Bitcoin utilizes cryptography to disguise identities and has a transparent public ledger. On one hand, this is an amazing construct but we need to consider the implications. Public wallets are viewable by anyone and include not only the balance of the wallet but also how much money has been received and paid out (including the public wallet addresses of senders and receivers).
Sure, this might be great for a non-profit or other publicly transparent entity…but do we really want anyone and everyone to see what we have and who we send to?
Imagine a business losing all of their client’s data to a competitor in the same field due to the fact that certain codes are traceable? That’s not what you would want for your business.
Bringing privacy coins into the picture.
These coins are meant to help give users a degree of anonymity in a robust and decentralized manner.
While there are other coins tackling these same use cases, we have opted to narrow down to the most popular coins based on the technology, market capitalization, adoption, and brand awareness.
We’ll cover some of the most basic privacy coins in this article. Check out the image below for a quick comparison.
Originally launched in April 2014 as BitMonero, Monero (symbol XMR), means money in Esperanto. Monero is a fork of Bytecoin and is a secure private untraceable currency.
A brief history from their website shares how we got to the current team: “The founder, thankful_for_today, proposed some controversial changes that the community disagreed with. A fallout ensued, and the Monero Core Team forked the project with the community following this new Core Team. This Core Team has provided oversight since.”
Monero leverages the CryptoNote technology as well as Ring Signatures, Ring Confidential Transactions and Stealth Addresses.
Due to Monero’s cryptographic privacy – its features of untraceability and unlinkability – coins avoid the potential of being tainted by deprecating transaction history. There is no risk of blacklisting nor debasing of Monero, therefore all coins are worth the same value and are mutually interchangeable.
Monero is truly decentralized and led by volunteer work. Developers are funded by user contribution through the Forum Funding System. Development decisions are open to public discussion, and developer meeting logs are published in their entirety for all to read. The Monero Project’s source code and all changes are available on the official Monero GitHub.
Dash (formerly known as Darkcoin and XCoin) is an open source peer-to-peer cryptocurrency originally forked from Bitcoin. Dash offers the same features as Bitcoin but has improved capabilities, including instant and private transactions.
Originally founded in January of 2014, Dash uses a two-tier architecture to power its network. The first tier consists of miners who secure the network and write transactions to the blockchain. The second tier consists of masternodes who handle the instant and private transaction sending and decentralized governance.
The main features of Dash include:
- InstantSend – Immediate transactions with ability to handle large volumes
- PrivateSend – A coin mixing service based on a decentralized CoinJoin implementation
- Decentralized Governance by Blockchain (DGBB) – A mechanism for management of future funding and development through a self-governing community
There is a real potential for an attacker with great means (e.g. a government, or group of hackers) to consolidate masternodes for nefarious purposes. Furthermore, there is nothing preventing these masternodes from logging the user’s output destinations, and there is no way to audit whether or not a masternode is logging anything at all.
This threat is further exacerbated by the fact that most masternodes are hosted on a limited range of Visual Private Servers (VPS) providers – which presents the possible, unknowable vulnerability of the VPS providers being able to log information without the masternode owner’s consent or awareness.
Moreover, from a practical standpoint, the mixing process is liable to take up to several hours or days to complete, depending on the amount of rounds the coins are chosen to mix through.
Since Dash’s blockchain is transparent by default, and only optionally utilizes mixing “privacy,” there is the potential for an entity to deny or blacklist Dash coins and addresses.
Zcash uses a new method of cryptographic privacy called “zk-SNARKs” (zero-knowledge Succinct Non-Interactive Argument of Knowledge). At the basic level, zero-knowledge proofs allow for a way to prove that the information you are sending to the other party (e.g. the amount of funds) is true, without having to broadcast said information besides the fact that it is true. In other words, you can verify the correctness of computations without having to execute them and you will not even learn what was executed – just that it was done correctly.”
The cryptography behind zk-SNARKs allows for all transaction data to be private and encrypted. Although Zcash’s privacy components on the cryptographic level raise no doubts (even though zk-SNARKs are a fairly recent development and lack peer review), there are other concerns regarding Zcash’s handling of privacy that are worth examination. Zcash offers the choice of optional privacy. In other words, privacy (“shielding”) is not on by default.
According to Zcash’s blockchain, only an approximate 5.05% of funds are held in z-addresses, which are private addresses utilizing zero-knowledge proofs to ensure privacy. On the contrary, a majority of Zcash transactions are not private and are easily viewable by an observer.
Zcash is not “private by default” particularly due to the inefficiency of zk-SNARKs. The process of creating a transaction with zero-knowledge proofs (zk-SNARKs) is slow and costly – requiring that you run a full node while demanding up to 4GB of RAM “for a minute or two” until the transaction is sent.
It is also the case that, because a majority of the blockchain is transparent, those who do use the privacy features stand out, and there may be the potential risk for an attacker to “isolate the few users who are using the privacy features.
Private Instant Verified Transaction aka PIVX, is a decentralized open-source privacy cryptocurrency launched on February 1, 2016, as Darknet (DNET) before it was professionally re-branded to PIVX. PIVX runs on the Blackcoin PoS 2.0 protocol and is based on a Bitcoin fork (same as Dash).
The main difference between PIVX and Dash is that PIVX is 100% Proof of Stake. This means PIVX doesn’t rely on miners, instead of rewarding holders through a Proof of Stake (POS) mechanism. This shift also puts more power in the hands of the Masternodes who verify transactions instead of the miners.
Another difference is the seesaw reward mechanism which PIVX uses to distribute block rewards. 90% of rewards go to Masternodes and Proof of stake nodes with 10% going to community projects.
PIVX provides a fresh and ground floor opportunities for new people who felt that they may have missed the Dash train. Leveraging the proven tech of Dash with their own tweaks and community support makes PIVX a solid player in the privacy space.
Privacy coins are super popular nowadays and we’re bullish on them. We see how it can benefit the crypto community and financial firms as well as investors. It is indeed a very complicated concept, so we tried our best to make it easy for everyone that is interested in crypto to understand them.
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