If anyone has ever pitched you the idea of cryptocurrencies, they must have pointed out how your identity will remain anonymous with each transaction. However, how true is this statement? Take BTC, for example. All transactions involving Bitcoin are stored immutably on its blockchain. Using any of the numerous blockchain explorer websites, one can see the details pertaining to that transaction, such as the transacting addresses and the amounts transferred.
With the right deduction skills and some technical expertise, one can even trace the public addresses to their actual owners. Worse still, if the transaction was made on a centralized exchange, KYC requirements mean that all users of the exchange have disclosed their identities to the platform’s owners. So how can one ensure total privacy and un-traceability? Enter privacy coins.
Defining the privacy coin
A privacy coin is a digital currency that hides a user’s identity as well as any other personally identifying transaction data. As a result, they provide a level of anonymity that other cryptos cannot match. These currencies employ a variety of techniques to conceal user information. For instance, some withhold the wallet’s address while others combine numerous transactions using a mixer. In the latter case, if somebody were to try to track the transaction from the receiver’s end, it would appear that the cash originated from the mixer rather than the original sender.
The apparent danger with these privacy coins is that they will facilitate illicit behavior such as money laundering. In fact, most of these coins, Monero, were utilized in 44% of all ransom attacks in 2018. In the dark web, these currencies are also a popular transactional medium. Alternatively, they could be used by those who want to keep their transactions covert, not necessarily to facilitate criminality.
How they work
These coins, like all other crypto tokens, rely on a blockchain to publicly store their records. They do, however, take extra precautions to guarantee that transactions made by the same addresses cannot be linked or traced back to their source. They do it by employing cryptography, which is designed to conceal a user’s wallet address, as well as other transaction data such as the amount being sent.
In today’s market, there are four basic approaches used by these coins. Let’s look at them below.
- Stealth addresses – Each transaction generates a non-reusable wallet address. This way, even transactions sent to the same address appear to have been sent to different individuals. This makes it difficult for third parties to pinpoint payments sent to your digital wallet.
- CoinJoin/CoinSwap – This is a mixer that aggregates transactions from different addresses. It then jumbles the funds with funds of other people using the mixer at the same time before sending out the corresponding amounts to the recipient addresses. This way, nobody can tell who sent what to whom.
- Zk-SNARKS – Short for a zero-knowledge succinct non-interactive argument of knowledge, this is a type of trustless calculation that tells the network that a transaction is valid without disclosing any details of the transaction, such as the transacting addresses and amounts.
- Ring signatures – These mix genuine transactions with several old decoy transactions, so anyone trying to trace any one transaction is looking for a needle in a haystack.
Top privacy coins of 2022
With a valuation of $3.65 billion at the time of writing, this is the top privacy cryptocurrency by market cap. It runs on the proof-of-work mechanism. To hide user identities, it makes use of stealth addresses and RingCT (Ring Confidential Transactions) technology. This enables its blockchain to conceal the amounts sent in transactions.
Following its growing popularity in criminal circles, the IRS put up a bounty of $625,000 in late 2020, payable to anyone who was able to crack its privacy tech. The prize money went to two blockchain analytics companies, Integra FEC and Chainalysis.
This is a digital currency that was launched in 2016 and is based on the same coding as Bitcoin. Its blockchain uses a proof-of-work consensus process, which implies that new currencies are generated through mining. Users of Zcash have the option of choosing between publicizing or anonymizing their transactions. Those who choose the latter option get their transactions encrypted using zk-SNARKS, which ensures they can’t be traced back to the individuals themselves. This enables them to meet compliance and audit requirements by selecting which transactions to publish.
This is another cryptocurrency with selective anonymity features, though the team behind Dash has been adamantly denying its status as a privacy coin. It is forked from Bitcoin and stores transaction details on its blockchain, just like its predecessor. However, unlike Bitcoin, it runs on the proof-of-stake mechanism. Users can choose to transact privately using its PrivateSend feature. This feature utilizes CoinJoin to maintain user anonymity.
Launched in 2014 as DogeCoinDark, this privacy coin rebranded to Verge Currency shortly afterward. It uses the Wraith Protocol to enhance user anonymity. This protocol utilizes the Tor network to hide the IP addresses of the transacting parties, thus ensuring their anonymity. However, this feature is not activated by default – users must turn it on if they intend to use Verge as a privacy coin. This coin also features high transaction throughput, low fees, and scalability.
This is a privacy coin that aims at making its transactions untraceable and un-linkable. Untraceable means nobody can follow a transaction back to the sender, while unlinkable means nobody can tell whether or not two different transactions were sent to the same recipient.
Untraceability is achieved using ring signatures, which string transactions together so that they are indistinguishable from one another. To un-link transactions sent to the same recipient, Bytecoin utilizes one-time keys. These keys generate a different wallet address for each transaction, making it look like each transaction was sent to a different recipient.
In a nutshell
Though cryptocurrencies are often touted as private and anonymous mediums of payment, they do not offer real anonymity, not really. Anyone with the right tools can easily trace transactions back to their source, as well as identify the individuals behind the wallet addresses. To prevent this, you would much rather utilize privacy coins. These tokens utilize complex encryption techniques to obscure your identity from ever being traced.