Privacy Coins: How Monero, Dash, and ZCash Will Enable True Privacy
Monero, Dash, and Zcash — A Primer on the Largest Privacy Coins on the Market
When cryptocurrencies were first introduced, anonymity and privacy were some of the main draws. Even the creator(s) of bitcoin, Satoshi Nakamoto, is shrouded in mystery as no one knows the true identity of the person or group. However, as the space evolved, the privacy of cryptocurrency users has continued to deteriorate. In many ways, bitcoin transactions are not anonymous as the open ledger offers perhaps the most transparent payment history of any financial system to date. While there are no official names directly attached to crypto wallets, there are still many steps users must take to ensure their privacy.
In response, a different class of cryptocurrencies was introduced: privacy coins. Let’s dig a little deeper into what makes a “privacy coin,” how they’re different from bitcoin and other cryptocurrencies, and learn a bit about the major privacy coins on the market today.
What is a Privacy Coin?
As the name implies, a “privacy coin” is a type of cryptocurrency that ensures the privacy and anonymity of its users. In the simplest terms, privacy coins rely on the same blockchain technology as cryptocurrencies like bitcoin, but go a step beyond in how they handle information about transactions and obfuscate some information. For example, bitcoin transactions are all recorded on an open public ledger showing that X address sent Y address ____ amount of BTC. While there are no names attached to wallet addresses, it’snot incredibly difficult to link addresses with people by the powers that be, especially when it comes to liquidating holdings with a licensed exchange.
Privacy coins, however, conceal information about senders and receivers during transactions through a variety of methods (which we’ll examine below). The important part to know is that, unlike bitcoin transactions, privacy coins hide information about wallet activity or at least offer the feature to users.
Given the nature of privacy-driven cryptocurrencies, it’s no surprise that they’ve garnered the attention of many government bodies. US officials are already considering the possibility of implementing more regulation around privacy coins to protect against illicit money activities. Regulators are concerned with the potential of privacy coins to more easily facilitate money laundering and illegal transactions. And while it’s true that privacy coins, among other cryptocurrencies, have been used in the past by bad actors, there’s another side to the story.
For starters, around 75% of all cryptocurrency-based illegal activities investigated by the FBI were conducted using bitcoin, not privacy coins — an overwhelming majority. Furthermore, advocates of privacy coins argue that these cryptocurrencies are nothing more than the digital equivalent of cash. Like cash, there are no records, no open databases of who owns what, and there are many legitimate reasons for using some. Most regulators aren’t considering banning cash and coins outright as means of payment and advocates believe officials should take the same approach with privacy coins.
Even if one were to set aside high-level arguments of privacy concerns, there are plenty of practical reasons to support privacy coins, with safety being perhaps the most important. When an open ledger publicly displays levels of wealth between wallet addresses, and those addresses are successfully linked to individuals, then coin holders have a major target on their back. This isn’t just true in theory, either. Recent events have shown this to be true with cryptocurrency robberies happening across the world.
Now let’s look at some of the biggest names in the space and how they make privacy happen. Keep in mind that there are many other privacy-driven coins available, but these just happen to be the largest privacy coins by market capitalization currently and illustrate three of the main methods for maintaining private transactions.
The Big Three
Perhaps one of the most well-known privacy coins, Monero actually started as a fork from Bytecoin in 2014. With Monero, the addresses of both the sender and receiver are kept private on the ledger, meaning there’s also no way to see the value of a user’s wallet. The Monero network protects user privacy by utilizing stealth addresses (a one-time address created by the sender for each transaction), ring signatures (a method that uses multiple signatures as decoys to obfuscate address of the sender), and Ring Confidential Transactions, also known as “RingCT” (an improved version of ring signatures that hides the amount of XMR used in a transaction).
Monero further increases the privacy of transactions via a unique splitting mechanism. Each full transaction is divided into different amounts and sent as a subset of separate, smaller transactions adding up to the initial amount. For example, if you wanted to send 1,000 XMR, this amount would get split into a variety of separate amounts, say 200 XMR +150 XMR + 325 XMR + 275 XMR + 50 XMR, each of which getting its own one-time address. Next, with the help of the ring signature, each separate transaction gets combined with a variety of decoy transactions, thereby rendering the transaction nearly impossible to trace.
Furthermore, Monero also features spend keys and view keys. The alphanumeric spend key allows an authorized user to conduct transactions on behalf of the account, while the view key allows permissioned users to look at a specific account’s holdings. This comes in handy when reporting holdings for tax purposes, or auditing a company’s financial reserves.
Unlike Monero, Dash is not driven with the sole purpose of privacy, but rather offers privacy protection of transactions as an option for users. The cryptocurrency was created through a fork of Litecoin and operates as a Decentralized Autonomous Organization (DAO), with the cryptocurrency’s governance run through its token holders.
Generally speaking, addresses and transactions are all viewable on the public Dash blockchain. However, users can take advantage of the PrivateSend feature to obfuscate transactions. Dash’s modified Proof-of-Stake X11 mining algorithm uses “CoinJoin” for private transactions.
Dash Masternodes (those who hold a minimum of 1,000 DASH tokens at all times and employ a static IP) further contribute to privacy and anonymity by taking the coins from your transaction and mixing them with multiple other coins being sent on the network. The result is a series of grouped payments being made simultaneously in which it’s impossible to decipher the various inputs and outputs of a transaction, thereby increasing anonymity. Dash rewards miners with block rewards, and pays fees to Masternodes to validate smart contract transactions.
Zcash was created as an alternative to Bitcoin, and claims to boast enhanced privacy and security. Unlike Monero, private transactions are not required when using Zcash. Instead, users have the option to use the enhanced privacy feature to obfuscate transaction details and use either a transparent wallet address or a “shielded address” to keep transactions private. To accomplish this, Zcash utilizes zk-SNARK, short for “Zero-Knowledge Succinct Non-Interactive Argument of Knowledge” and the zero-knowledge security layer (ZSL).
These two security mechanisms permit existing blockchain applications to support semi-transparent transactions, effectively allowing users to display a small sub-set of data pertaining to any transaction. This is used in everyday applications to verify that payments were executed at specific times. However, it masks critical user information in the process, including the sum of the transaction as well as the personal information of both transacting parties.
Privacy coins are a contentious topic around the world, but their use extends beyond darkweb marketplaces selling narcotics and other illicit goods and services. What some see as a tool for nefarious acts others see as a basic principle of financial and personal privacy of law-abiding citizens. Regardless of one’s stance on the topic, there are now more privacy coins than ever to choose from.