Privacy coins are cryptocurrencies but with some built-in stealth mechanisms. Stay tuned to learn more, understand how they work, and a few of them for a head start.
There are a ton of articles telling you Bitcoin (and other cryptos) transactions aren’t anonymous.
Everyone can check the records since all details are available on a public ledger, better known as a blockchain.
The key is to link a public address to an individual. That’s it. Afterward, one can check everything about that specific user–all transactions, including the amount, timestamps, receivers, etc.,
On the contrary, only a few know what I do with my paycheck once I withdraw it from the nearby ATM.
This drawback of regular cryptocurrencies is addressed by these privacy coins.
What are Privacy Coins?
These are made to hide some information about blockchain transactions that can lead a snooper back to you.
However, privacy coins aren’t 100% anonymous (nothing is!), and the supposed ‘privacy’ greatly varies by the design of the specific protocol you’re dealing with.
Still, they hide a few significant details, making them more anonymous than Bitcoin.
How Do Privacy Coins Work?
There are so many ways this plays out with digital public ledgers.
Some hide addresses, transaction amounts, etc., to keep it a secret. Another technique uses ring signatures where it’s impossible to link the transaction back to any specific individual.
Some protocols even burn and create coins after every transaction.
Conclusively, there isn’t any single method to privacy, and we’ll see how this fares out with these top privacy coins.
Currently, the biggest privacy coin by market cap, Monero, is private by default. This means there is no risk of leaking transaction details to anyone.
It uses Stealth Addresses, Ring Signatures, and RingCT to cover the sender, receiver, and transaction amount.
Stealth Addresses generate disposable addresses for each transaction. In addition, it keeps it separate from the published address used for incoming payments.
Ring Signatures pulls a group of public addresses from its blockchain, and the transaction gets signed by anyone, making the output hard to be linked back to a specific user.
RingCT is an upgrade over the Ring Signature, aimed to improve anonymity by hiding participants, coin whereabouts, etc.
Monero is widely accepted by top-tier crypto exchanges and 3rd-party online stores.
Zcash gives you the best of both worlds. One can be anonymous or visible like the ‘standard’ blockchain transactions.
This is made possible by two addresses, Z and T. The ‘Z’ ones are shielded for privacy, while the ‘T’s are open. A Z-Z transaction hides everything except the fees, whereas a T-T event mentions the amount, fees, and addresses.
Besides, any exchange between a Z and T shows all the details except the Z’s public address.
For compliance, Zcash deploys zk-SNARKs, which is short for Zero-Knowledge Succinct Non-Interactive Argument of Knowledge. Put simply; this can help prove the validity of a transaction without giving out the details. So, you can validate transaction claims to anyone without revealing your public address.
But the catch is that they don’t support shielded Zcash, and most are only open to transparent Zcash.
However, what works out in favor of Zcash is quick block times, decent block size, and low transaction fees.
Here, the output addresses are encrypted, making it impossible to match them with the inputs. In addition, it masks the ownership of DCR coins.
Instead, it proposes its own, DCRDEX, to maximum anonymity and security while transacting. You can use DCRDEX without the usual KYC process, and it’s also free from any transaction fee.
Remember what makes blockchain events permanent–their history. You can trace every coin and check how many hands it has changed.
Firo takes that out of the picture.
What happens is every coin gets burned and redeemed after every transaction. Additionally, every redemption is zero-knowledge, meaning no one knows you burned the coins.
Firo is further updating this to Lelantus Spark, which will have no redemption and instead will mask all the amounts.
Several top platforms support exchanging/swapping Firo, including Binance, BITTREX, its native firoDEX, etc.
ZEN (Horizen) takes a similar optional approach to privacy as Zcash (as discussed above) by using zk-SNARKs.
This provides T and Z addresses for conducting visible (T-T) and concealed (Z-Z) transactions, respectively.
Private transactions mask the participants’ addresses and the amount. However, T-Z transactions will have the T-address revealed along with the proceeds.
ZEN has excellent availability on top-tier exchanges.
However, you must use their application SPHERE to generate Z addresses to benefit from the privacy features.
Secret is a bit of an oddity here. This pitches privacy-as-a-service for any coin or a complete blockchain.
The idea is to share or hide transaction details as per convenience. Secret protocol cloaks assets with a private version (ETH ➡️ sETH) which reverts to their original state when required.
All this action is supported by Secret Token Smart Contract, which enables you to encrypt the token balance, wallet address, transaction amounts, etc.
Please note your interaction with the Secret Smart Contract will still be visible.
Another factor that separates this from the above entries is that it can also work to create anonymous DeFi applications and make private NFT transactions.
Are Privacy Coins Legal?
Crypto is already pseudo-anonymous, and these (and more) private coins take this anonymity a few notches up.
So, while we may not hear about outright bans, many crypto exchanges don’t support private coins or their private versions.
Similarly, as already mentioned, some top exchange portals don’t support shielded Zcash.
So, there might be an ongoing struggle within the law enforcement authorities on how to regulate such tokens and avoid illicit use.
However, a single explanation can’t be valid for all, and you should search for your location-specific laws about private cryptocurrencies.
While someone can ‘study’ to trace your every transaction on any blockchain, private coins like Monero solve this problem for good.
These coins have their version of privacy and use cases.
PS: Crypto is a strange world with some pleasant surprises. One among them is the move to earn (M2E) crypto/tokens.