The original promise of Bitcoin was that it’d be a safe and secure way to conduct transactions without revealing your identity. Unfortunately, the current cryptocurrency environment has grown to undermine some of these privacy-centered efforts. However, several blockchain organizations have taken up the torch on cryptocurrency privacy efforts, and a proliferation of so-called “privacy coins” have come into fruition.
What are privacy coins?
In the world of cryptocurrencies, privacy coins are blockchain tokens that are optimized for user anonymity and security.
Contrary to popular belief, most cryptocurrencies aren’t as private as one would think. A term to describe the nature of most cryptocurrencies, including Bitcoin, is “pseudonymous.” There are some levels of anonymity that they afford, but with the proliferation of cryptocurrency exchanges, this vital trait has quickly become a myth.
Exchanges nowadays often require users to submit all of the important personal documents that traditional stock exchanges require. These include photo I.D., social security number, addresses, and bank accounts. As a result, it’s really not too difficult to trace blockchain transactions back to a user on a crypto exchange.
Fortunately, there are a handful of blockchain projects that seek to restore the original anonymity ethos behind the founding of Bitcoin. Privacy coins utilize various software tricks that uphold the anonymity of users.
How do privacy coins work?
Summarized here are just a few software techniques that allow privacy coins to anonymize token holders.
- Stealth addresses
Satoshi Nakamoto, the mysterious founder of Bitcoin, is quoted as saying, “for greater privacy, it’s best to use bitcoin addresses only once.” By this, Nakamoto meant that for optimal privacy, it’s best to switch wallet addresses every time you conduct a transaction. This makes it harder for your sum total of transactions to be linked back to you.
Stealth address protocols provide an automated way for this to happen. They generate random, one-time cryptocurrency wallet addresses each time you conduct a transaction.
Short for “Zero-Knowledge Succinct Non-Interactive Argument of Knowledge,” zk-SNARKS are a way for blockchains to confirm that you own certain pieces of information without requiring you to reveal what that information is.
For the purpose of privacy coins, zk-SNARKs prevent blockchain transactions from revealing who the sender and receivers are, the amount being transacted, and potentially the IP address of both entities.
- Ring signatures
Another tool for blockchain privacy is ring signatures. This is a software method that allows a group of individuals to conduct a transaction without anyone knowing which specific individual initiated it.
Cryptographic interactions usually require the use of public and private keys for validating the sender and receiver. Ring signatures create a single public key for a group of individuals without revealing their private keys, thus making the transaction untraceable to any individual.
Instead of a person sending a specific amount of tokens to a receiver, CoinJoin merges the transaction amount with a pool of tokens, scrambles them, and redistributes them appropriately to the receivers.
Doing this prevents outside observers from knowing which tokens came from which sender, and scrambles the link between any two individuals participating in the transaction.
Reasons for choosing a privacy coin
Despite their association with dark web activity and money laundering, privacy coins actually have many use cases for the average user. Reasons for choosing privacy coins are that they:
1. Protect business activity and purchases
For businesses and corporations, privacy coins offer a way to hide activity and purchases from competitors. Since blockchain ledgers are viewable by anyone, it wouldn’t help for a rival business to know exactly how much a client is buying a product or service for.
2. Protect token holders
Thanks to the public nature of blockchain ledgers, it’s possible to see exactly how much funds are associated with a given cryptocurrency wallet address. Token holders with millions of dollars in assets, for example, are massive targets for hackers. If a wallet address is linked to an individual, that individual is at greater risk of being targeted by anyone who wishes to strip them of their tokens.
3. Undermine government surveillance
Governments are becoming increasingly interested in blockchain technology. But not because of the financial freedom it affords to crypto holders. China, for example, wants to implement blockchain tech as a means to monitor transactions for anything it deems nefarious.
The best privacy coins
So which cryptocurrencies double as the best privacy coins? Below is a list of the most popular privacy coins today.
Arguably the most popular privacy coin, Monero utilizes several software techniques to ensure the full anonymity of token holders. Because of its security and censorship resistance, it is a favorite choice for black market transactions and counterculturists. Monero utilizes stealth addresses, ring signatures, and a type of zero-knowledge proof.
Zcash mainly leverages zk-SNARKs to cloak the identities of senders and receivers, as well as the amount being transacted. But Zcash also has ways of allowing for selective transparency if a token holder wishes to comply with an organization’s rules.
Dash, short for “Digital Cash,” uses what the developers call PrivateSend to ensure anonymity during transactions. PrivateSend is actually a slight variation to the CoinJoin pooling method. Transactions between two individuals are scrambled with a pool of other transactions whereby the funds are then distributed appropriately to each receiver without linking them back to the actual sender.
PIVX is actually a software fork of the above-mentioned Dash protocol. While not yet a full-fledged privacy coin, the PIVX team has plans to roll out a zk-SNARK privacy layer which will be called Sapling.