Understanding Blockchain and Privacy Part II: “Privacy Coins” and Their Vulnerabilities
As we’ve established in the first portion of this series, cryptocurrencies are far more visible than they initially appear. Through public wallet addresses attached to identifying information found across platforms where crypto is exchanged, it can be quite easy to track crypto transactions across their public ledger and find the source of the funds. Pseudonymous cryptocurrencies like Bitcoin and Ethereum can’t be safely stashed away with 100 percent certainty that they will never be found.
For those looking for extra privacy and anonymity while engaging in digital transactions, however, the next asset of choice is a crypto that falls into the “privacy coin” category. These coins, with some of the most notable being Zcash and Monero, are said to offer a safe haven for individuals who want to keep their funds safe from prying eyes. But how do they function, and do they really provide the safety that they promise?
Popular Privacy Coins
Dash is a heavily re-branded project that was launched in January of 2014 as Xcoin, changing its name to Darkcoin soon after and eventually becoming the Dash coin that we know today. Acting as a decentralized autonomous organization, the system revolves around Masternodes that stake a significant amount of Dash to keep the system up and running. It is this system, however, that compromises the security it is said to provide.
Dash offers a privacy feature known as private send, which is designed to hide transaction information by mixing the coins of three different users at a time and sending out the same amount to different addresses. Of course, in order to accomplish this, users have to first contact a Masternode, which is responsible for carrying out the mixing.
The issue? These Masternodes know exactly where the coins are going, even after they have been mixed. If this information were to get out or if a node were to be run by a party hoping to infiltrate the system, the perceived privacy is completely dissolved. You may have also picked up on the term, “mixing”, which holds negative connotations within the Bitcoin community and proves to be a relatively weak activity in this system as well.
Overall, while Dash can make it harder for transactions to be traced, it doesn’t promise the full privacy that users expect when using the asset.
Zcash is (partially) a privacy coin that uses a special protocol known as zk-SNARKs to safeguard transactions. Put simply, zk-SNARKs bypasses the need for information to be verified, making it so that the system knows that something is confirmed without having to go through the typical confirmation processes.
It should be noted that, while Zcash is said to offer privacy features, it is not a project featured entirely on privacy. A lot of users carry out transparent transactions on this network. If they do wish to use privacy features, however, this is performed by asking the system to shield their address from the recipient of their crypto, a feature that can be utilized for both the sender and the recipient. That said, the system has been proven to be unreliable, leaking key data in the transition from public to private blockchain for transactions and having transactions that are relatively traceable, even with private transactions on.
Again, while this popular project is a go-to for many, it isn’t going to necessarily result in anonymous spending.
One of the most well-known private coins, which is largely due to its unique development, Monero utilizes ring confidential transactions, ring signatures, and stealth addresses to mask true transactions by hiding the amount being transferred as well as the final destination of the crypto. It also gives users the ability to list one address as the receiving address while having transactions sent to multiple linked addresses.
Despite its impressive structure, this cryptocurrency is not the most secure either as many hacks have proven in the past. The developers are still making improvements as they go but as you may have guessed, the security issues are still present and may not provide you with the coverage that you expect.
While privacy coins are widely regarded to be more secure than their pseudonymous counterparts, many projects still lack the airtight security that is required to hide transactions from sight. If you are considering using a privacy coin for personal reasons, make sure to keep the above in mind before you invest in the project of your choosing.