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We live in turbulent times. In a world where our behavioral data has given us the product, “privacy” has become synonymous with “freedom”. Yet businesses and governments encroach on these freedoms without any constraint in sight.
Since you are reading this guide, I’m going to assume that you have a strong suspicion of anyone who lurks in the shadows with prying eyes. And if you thought Bitcoin gave you enough privacy, think again.
This is because Bitcoin, as well as most other cryptocurrencies, is not anonymous, as is generally believed. They are pseudonyms! Without going into Byzantine fault tolerance in game theory, Bitcoin essentially works by ensuring that all other participants in the public blockchain also hold an add-only ledger.
Since everyone’s ledger data needs to be 100% synchronized, every wallet address and every crypto transaction ever executed is publicly available. Say, for example, you request KYC (Know Your Customer) verification to use a crypto exchange like Binance or Coinbase, once your Bitcoin address is linked to your identity, all of your financial transactions can be tracked easily.
Kinda crazy how quickly you can lose your privacy, right?
Enter the privacy rooms, but what are they and why were they created?
What are privacy coins?
Privacy Coins are cryptocurrencies that were created to bring the element of privacy to the fore. Many OG crypto heads, like those in the cypherpunk movement, are strong privacy advocates. They believe that financial privacy is a fundamental, non-negotiable attribute of a sound currency.
Privacy and freedom are strong political attributes that we associate with money in general. No one wants governments, big businesses, and financial institutions to keep track of how much money we have and how we spend it.
Are the privacy documents legal?
They are legal in most countries, but there is a risk that they will be banned in the future. And I say “most countries” because places like South Korea and Japan have already gone ahead and banned it. If you thought Bitcoin was a threat to fiat currency, wait until you wrap yourself in privacy coins.
So how do they work?
3 popular privacy rooms and the technology behind them
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Not all privacy pieces work the same. Each team behind a privacy room works out what they think is the best strategy to keep users’ privacy safe. They achieve this by combining various cutting-edge cryptographic primitives with cryptographic research.
Let’s take a look at three of the most popular privacy pieces and the technology behind them.
Monero (XMR) is one of the first privacy coin projects in the crypto space. Stealth addresses, ring signatures, zero-knowledge proofs (zk proofs), and RingCT form Monero’s proprietary privacy protocol.
Here’s a breakdown of these technologies:
When a transaction is initiated on Monero, the protocol creates a one-time, random destination address for the transaction, known as stealth address. Stealth addresses cannot be linked to the recipient, thus ensuring their confidentiality.
In order to protect the anonymity of the sender, ring signature are used to sign the transaction. Ring signatures are formed from the sender’s public key along with a number of other public keys. This helps to obscure the identity of the actual sender.
To verify transactions, Monero deploys a non-interactive version zk-Evidence known as bulletproof. In general, zk-proofs allows one party to prove to another party that a particular statement is true, without conveying any information other than that the statement is indeed true. For example, zk-proofs allows Alice to prove to David that she is Alice, without having to show any ID.
Ultimately, Ring CT obscures the actual values of transactions. Monero also broadcasts decoy wallet addresses with every transaction. This ensures that anyone on the trading trail will have fun sifting through all transactions, real and otherwise.
Combined, these features give Monero a high level of privacy.
Much of the Monero team remains anonymous today. So far, the team has managed to roll out updates every 6 months. The Monero developer community is not monolithic, however. Instead, it is organized into working groups based on their respective expertise.
Did I mention that Monero is based on Proof-of-Work consensus? (Pssst! This means that it is exploitable. And you can read more about Monero mining here.)
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Another privacy coin, Zcash uses the Bitcoin algorithm, but with zk and protected addresses (similar to stealth addresses in Monero). While Monero uses stealth addresses for recipients and ring signatures for senders to protect their privacy, Zcash’s protected addresses can be enabled for both senders and recipients.
Similar to Monero, Zcash also uses a version of the non-interactive zk proof, known as “zk-SNARK” (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge). You can think of zk-SNARK and bulletproofs as cousins that work the same way, but use different methods to construct proof.
Unlike other privacy coins, Zcash senders can also include private memos in protected transactions. (I can’t do this with Monero!)
Zcash is unique because it offers completely private services and fully public transactions, allowing users to make some transaction details public, while hiding others. In reality, a large majority of Zcash transactions are public. This raised concerns that a third party could identify private transactions by elimination.
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The dashboard is a special case. The Dash Core Group has made sure to let you know, on several occasions, that Dash is NOT a privacy room. (“You still don’t get it ?!” They occasionally shout into the crypto void. “For the last time we’re not a privacy room, okay !?”)
Dash is, in fact, a room that prioritizes user utility above all else. This is why Dash ensures privacy as optional functionality for its privacy-conscious users. This feature is called PrivateSend. (Note that using this optional privacy feature incurs higher transaction fees.)
Instead of implementing zk proofs, Dash uses a mixing method, known as CoinJoin, to perform PrivateSend transactions. With CoinJoin, each PrivateSend transaction is partitioned into many small amounts and the wallet addresses are scrambled with those of other PrivateSend users. Dash then combines all the transactions and publishes them as a single, unified transaction. This approach makes it impossible to decrypt transactions and identify amounts that belong to whom.
Since Dash prioritizes user experience and utility, its blending approach may be deemed unsatisfactory for the most ardent privacy coin users in cryptovers.
Challenges with privacy coins
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The risk of privacy coins stems directly from its main appeal of being able to hide all transactions. This gives rise to the possibility of privacy coins being used by bad actors for illicit activities and financial transactions, making it almost, if not outright impossible, for law enforcement to identify a lead. ‘money. That’s why authorities are generally not receptive to confidential coins, and state organizations like the IRS have issued six-figure bounties for “breaking” coins like Monero.
Given the authorities’ negative stance, cryptocurrency exchanges also generally take a cautious approach when listing privacy coins. Some exchanges that previously offered confidential coin pairs have also removed them from the list. Movements like this directly limit the number of avenues a user can exit or liquidate their privacy coin holdings, potentially reducing the attractiveness of privacy coins to the average cryptocurrency user.
That’s not to say that privacy coins are without their fair share of criticism. Monero is, after all, the most requested coin by those who carry out illicit activities. Besides ransomware, illegal activities include financial crimes like money laundering.
Whatever your opinion on privacy coins, one result seems certain:
The privacy pieces are here to stay, and privacy will take on a more central role in our lives in the future.
Valerio is a blockchain and cryptocurrency writer, and founder of the Freelance Copywriter Collective. He lives in Chiang Mai with his life partner and his dog.