One of the main selling points of cryptocurrency is the degree of anonymity it offers. However, many crypto enthusiasts feel that many popular cryptocurrencies like Bitcoin lack true privacy.
Privacy pieces are specially designed to add a layer of privacy to the benefits and cryptocurrency functionality.
What are privacy coins?
A privacy cryptocurrency hides information about its users, including identities and other transactional information.
Contrary to popular belief, the popular Bitcoin cryptocurrency is not anonymous – it is actually one of the most transparent ways to send money since all transactional records are stored in the blockchain.
People won’t be able to see your name (e.g. Jack Johnson), but they can see your public address – it doesn’t take much to associate an identity with a public key, especially if you have the resources of an organization such as the FBI or the DEA. Many cryptocurrency exchanges require their users to go through KYC / AML to explicitly set their identities before using the exchange.
If someone identifies the person behind a Bitcoin transaction, they also know who is behind all other transactions from that address. Those interested could also connect the nodes of the Bitcoin network to track transactions. It’s easy to understand, thanks to the public ledger.
For example, the Bitcoin address of Satoshi Nakamoto (the creator of Bitcoin) has been publicly visible since its inception.
Enter the privacy pieces. Confidentiality documents hide any information that could link an individual to a transaction. While all privacy pieces aim to provide this level of privacy, some vary in their degree of anonymity. Many hide the size of cryptocurrency transactions or the amount of cryptocurrency you hold.
Why are cryptocurrencies not private?
It is simple to determine the parts of a completed transaction based on a Bitcoin address, but it takes time. Bitcoin and other cryptocurrencies pride themselves on transparency, which makes the system trustworthy.
Simply put, privacy coins sacrifice transparency for privacy.
How privacy coins ensure privacy
Privacy coins typically offer privacy in one of two ways. Those who focus on anonymity hide the identity of the people behind the transactions. Those who emphasize intraceability prevent people or IT systems from following a transaction trail.
Privacy coins typically rely on one of many primary strategies to achieve one of these two goals.
CoinJoin or Coin Mixers
A very popular option for cryptocurrency anonymity is coin mixers or CoinJoin. This is not a particular coin per se, but rather a program that combines multiple transactions to create a single transaction.
Then it splits up that single transaction to send the relevant amounts to each recipient. In other words, the cryptocurrency that each recipient gets will come from a combination of senders instead of just one.
Coin mixers aren’t exactly completely anonymous. They are just more cumbersome to disentangle.
Ring addresses connect different wallet addresses, so it’s not clear which of them sent or received the transaction. Monero is one of the main privacy coins that use this technique.
Privacy coins that use stealth addresses create new addresses for every cryptocurrency transaction.
One of the most popular examples is Monero (XMR). Monero relies on the dual key stealth address protocol, a specific type of stealth address.
A system called Zero-Knowledge Succinct Non-Interactive Argument of Knowledge (zk-SNARK) allows the blockchain to prove the validity of transactions without identifying parties or balances, hence the “zero knowledge” part of the name.
Who uses the privacy rooms?
Popular criticism of privacy coins is that they are attractive tools for criminals. Critics argue that privacy coins make it easier to finance terrorism, money laundering, or manage finances for other illegal activities, with little or no potential repercussions.
However, advocates of privacy coins simply want the privacy of transactions. There are many reasons why someone just wants to keep their transactions private, like hiding their wealth, so that cybercriminals don’t try to target them, or they just don’t want to disclose how they spend their money.
Private currencies and regulation
Coin privacy laws vary by country, just like any other cryptocurrency. Some ban them outright, while others leave them in a legal gray area.
South Korea and Japan, for example, have decided to make the use and possession of private coins illegal.
In the United States, privacy coins are technically legal, but regulators have been working on methods to exploit information kept in the dark.
However, if you try to buy privacy coins on popular US exchanges like Coinbase, you will find yourself in dire straits. While working with regulators, many exchanges have been urged to remove anonymity and confidentiality pieces like Monero and Zcash from their exchanges.
Lots of pieces like Monero can be mined using methods similar to Bitcoin mining. The legal risk, although not explicit today, however rests entirely on the minor.
Confidentiality Parts exchange Availability
While private rooms are not explicitly prohibited, their availability is limited.
Guidelines such as AML (Anti-Money-Laundering), CFT (Combating the Financing of Terrorism), and KYC (Know Your Customer) obligations require cryptocurrency exchanges to collect certain information about their customers, which is not not always possible with privacy coins.
To avoid being hit with fines, fees and outright bans by regulators, the exchanges simply choose not to list the privacy room.
The Financial Action Task Force (FATF) guidelines, updated in June 2021, include new AML / CFT guidelines, including new AML / CFT recommendations. To avoid legal issues, many exchanges have chosen to no longer list privacy exhibits.
That’s why you won’t find some of the bigger privacy coins, like Monero, Dash, and Zcash, on Coinbase or Bittrex.
The most popular privacy pieces
To better illustrate privacy pieces, let’s explore some popular privacy pieces.
Beam uses the Mimblewimble (MW) protocol, which eliminates the need for any address. It makes private transactions the default.
Dash is a fork of the Bitcoin chain that is based on the CoinJoin method. Dash gives users the option of whether they want your transaction to be public or private.
Instant send, another unique feature of Dash, will send and confirm transactions within two seconds.
Monero has the largest market capitalization of its ilk. It was launched in 2014 as a Bytecoin fork.
Monero relies on stealth addresses and ring signatures to hide everything from sender and recipient addresses to the full transaction amount.
So, in theory, one could send $ 1,000,000 in Monero across the world in less than 30 minutes for a trivial transaction fee of less than $ 20, and no one would be able to discern who sent how much and to whom. .
Verge is an open source project maintained by volunteers. It aims for confidentiality via I2P and TOR, the first of which encrypts data. After encryption, TOR sends communications to a distributed network run by volunteers. This combination completely masks IP addresses for transactions that cannot be found.
Verge was originally launched as DogeCoinDark as an anonymous version of Dogecoin, but was renamed in 2016.
Zcash relies on the zk-SNARKs protocol to hide personal and confidential data, such as cryptocurrency addresses and the amount of a transaction.
A unique feature of Zcash is that it not only offers fully private transactions, but it also offers fully public transactions and the ability to make certain aspects of a transaction public and some private. This makes it more friendly to regulators than other options, as regulators prefer public transactions.
Zcash has the unique option of allowing senders to include private memos in fully protected transactions.
Final thoughts: what’s wrong with privacy coins?
When using regular cryptocurrency like Bitcoin, your transactions are not completely private. With enough time, a computer program or person could link your identity to your wallet address and find out how much cryptocurrency you hold based on public ledger information.
While cryptocurrencies like Bitcoin advocate decentralization, privacy coins add another layer of anonymity.
This feature has created mixed feelings both inside and outside the cryptocurrency industry. Since privacy coins are more difficult to regulate, and cryptocurrency advocates tend to lobby government regulators, many in the community have attempted to hijack the image of anonymous coins.
To this end, many outside the cryptocurrency industry mistakenly attribute the potential negatives that can come from privacy coins (funding illicit transactions, etc.) to coins like Bitcoin, which is arguably more transparent. than the US dollar.
Privacy coins are part of financial history in motion and are a chapter to follow.