What Are Privacy Coins?

Dive into a high-level overview of crypto’s privacy coins.

ShapeShift
Feb 28 · 6 min read

Privacy coins are unique cryptocurrencies that allow a user to gain total anonymity when making blockchain transactions. The identity of users and the origins of their transactions are completely protected. These coins empower senders and receivers to remain anonymous with different levels of privacy, like hidden wallet addresses and transaction balances. With privacy coins, payments actually remain private.

Is Bitcoin really private?

Privacy coins take the anonymous nature and privacy ethos of Bitcoin to the next level. When you start to gain an understanding of privacy coins, you can start to see that Bitcoin itself really isn’t that private. Many cryptocurrency newbies believe that Bitcoin transactions are anonymous. The truth is they are only pseudo-anonymous. Bitcoin protects some information, but not all of it. Anybody who understands the technical aspects of how Bitcoin transactions work and how the blockchain operates; can trace transactions.

Below are examples of how Bitcoin transactions can be tracked.

Connecting Nodes
Bitcoin is a peer-to-peer network where nodes can be connected to each other. Anyone with sound deductive reasoning skills and a penchant for digital forensics can theoretically connect the dots (nodes) together and uncover transactions. This is not easy, but certainly possible.

Know Your Client Verification
Users trading Bitcoin on an exchange and identifying themselves, makes tracing transactions back to that user easy.

The Public Ledger
Bitcoin’s blockchain serves as a public ledger. Transactions are open to everyone, which means addresses are traceable. If even one address is tied to a specific user, other addresses in that group of transactions on the blockchain can be tied to that very same user.

Privacy Focused Cryptocurrency Projects

It’s estimated that there are 63 different privacy coins available for trading on the cryptocurrency market today. These projects are worth just over $2 billion combined. While each project undoubtedly tries to offer the best approach to privacy as possible, the reality is, five projects dominate. They include:

  • Monero
  • Dash
  • Zcash
  • Verge
  • Bitcoin Private

Monero

Monero is by far the most popular privacy coin in the world. Nearly every incident involving a headline-grabbing hack sees criminals taking their proceeds in Monero tokens. The project makes transactions unlinkable and untraceable using ring signatures and stealth addresses. This hides the identities of both the sender and receiver. The amount being transferred between two users is also hidden using Ring Confidential Transactions. Monero is by far the most proven and trusted privacy coin on the market today, which is why it’s the most valuable token in the category by market capitalization. The project is currently worth $1.13 billion.

Dash

Dash is actually a fork of the original Bitcoin code, like many other altcoins. The meaning of the name is simple. It’s a simple combination of the words digital and cash. Dash launched in January of 2014 and is widely considered the first-ever privacy coin in the history of cryptocurrency. Its first-mover advantage in the category isn’t the only reason Dash is a $640 million project. Its anonymization strategy revolves around something called PrivateSend. PrivateSend hides transactions by mixing them together and introducing them to the blockchain as one single transaction.

For example, three separate transactions from A to D, C to F, and G to Y could appear on the blockchain as ADCFGY. In other words, it’s simply a string of characters that seem to represent one transaction.

Zcash

It’s been said that Zcash uses a concept called Zero-Knowledge Proof, a cryptographic tool that allows users to transact between each other without anyone revealing their own address to anyone else. Users have the ability to hide or grant access to their addresses as they wish, which gives them greater control. Other projects don’t necessarily provide that function.

Transactions on the Zcash network are verified using zk-SNARKS. That stands for Zero-Knowledge Succinct Non-Interactive Argument of Knowledge. All blockchains use a non-interactive method of proof because transactions have to be verifiable by every node on the network. It’s virtually impossible to allow all parties to interact on a decentralized blockchain while also maintaining anonymity. Non-interaction is key.

Verge

Verge is a privacy coin that is built for everyday use. This open-source volunteer-driven project is providing a fast, efficient and decentralized way of making direct transactions while maintaining privacy. Verge uses multiple anonymity-centric networks such as TOR and I2P. TOR transfers user communications to a distributed network run by volunteers. I2P encrypts the data before it gets sent through. The IP addresses of the users are fully obfuscated and transactions are completely untraceable.

Bitcoin Private

Bitcoin Private is really a product of two different projects merging together Bitcoin and Zclassic (which itself is a fork of the Zcash code). Like many other tokens that use Bitcoin’s name, Bitcoin Private boasts a strong following who like Bitcoin’s original coding structure but wanted to make a specific aspect of its features better. BTCP supports zk-SNARKS as a method of proving transactions, has a large block size of 2MB and faster block times of two and a half minutes.

Why Privacy Coins Matter

Anyone that wants proof of how valuable user data is, needs only to look at the small number of companies that make up the technology industry’s oligopoly: Amazon, Facebook, Google, Alibaba, Microsoft, etc.

What do they all have in common? They all leverage our personal data to make money. They have been hacked before, and they’ve all come under the scrutiny of government agencies many times before. They seem to dominate so much of the technology, push the limits of privacy and ultimately commoditize the ideas, thoughts, and actions of individuals.

That’s why old-school cryptocurrency advocates built Bitcoin, and it’s why so many others have entered the space since. To try to give the individual power over their money yes, but just as importantly, over their privacy.

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