A privacy coin is a category of cryptocurrency asset that keeps user data private. Each privacy coin hides or “obscures” a specific type of user data, whether that be a user identity, transaction amount, or anything and everything else.
How Do Privacy Coins Work?
Contrary to popular belief, all cryptocurrency assets aren’t inherently private or anonymous. The majority of the blockchain networks, such as Bitcoin, publicly broadcast transactions and wallet balances on the blockchain; hence the value of an immutable, transparent blockchain. In most cases, it’s easier to trace someone’s Bitcoin financial activity than it is to trace their physical fiat activity.
Even if the digital public ledger didn’t provide this information on a silver platter, someone with a sound knowledge of digital forensics and a penchant for deductive reasoning could efficiently track peer-to-peer cryptocurrency transactions– all they would need to do is skillfully connect the nodes and uncover the transactions.
The last nail in the coffin for digital anonymity with traditional digital assets such as Bitcoin is the “Know Your Customer” KYC policies of exchanges. To trade Bitcoin on an exchange like Coinbase, Gemini, or Kraken, you’ll need to provide an abundance of personal identifiable information. This makes tracing a transaction to its origin a piece of digital cake.
Privacy coins address and resolve these issues by deploying a diverse set of tactics to keep the data hidden. They usually leverage a mix of multiple strategies to accomplish their goal, such as:
Stealth Addresses: Creating stealth addresses implies the creation of a new address each time you are to receive cryptocurrency. It ensures that external parties don’t get to link future payments to a permanent wallet address. Monero is the prime example of a privacy coin that deploys this technique. Monero deploys a dual-key stealth address protocol or DKSAP strategy to offer each wallet owner a new private view key, recipient address, and a private spend key.
Ring Signatures: Blockchain transactions require your digital signature to verify that you’re the sender. Since each user’s signature is unique, it’s not difficult to trace back a transaction to you with your signature. The Ring Signature strategy combines your signature with other signers in the ring– the higher the number of signatures in a ring, the more difficult it is to directly connect you with your transaction.
CoinJoin: The CoinJoin technique takes the coins from different senders and combines them into a single transaction. Then, a third party mixes the coins and sends them to the recipients. At the user end, each recipient gets his/her coin in a never-used-before address. This reduces the likelihood of a transaction being traced to a very low probability.
zk-SNARKS: zK-SNARKS, or “Zero-Knowledge Succinct Non-Interactive Argument of Knowledge” is a form of cryptography that allows one to prove it possesses specific information without having to reveal the contents of the information. Privacy coins using zK-SNARKS can prove a transaction’s validity without sending critical pieces of information, such as the sender or receiver’s identity or the number of funds trading hands.
MimbleWimble: MimbleWimble is an entire blockchain protocol that doesn’t even have addresses. MimbleWimble uses a type of elliptical-curve cryptography and is incredibly efficient at storing data. It only needs about 105 as much data storage as the Bitcoin network, making it a very low-weight highly-scalable solution for storing information.
The Top Four Privacy Coins
The most successful privacy coins deploy one or multiple strategies from the above list to provide users near or complete transactional anonymity.
With over 83 privacy coins holding a total market cap of more than $10 billion, privacy coins still make up a very small percentage of the digital asset ecosystem– they occupy less than 1%.
The following top four privacy coins have gained their reputation due to usage, longevity, and overall investor sentiments.
Unlike many other privacy coins, Monero isn’t built on the Ethereum protocol– it runs on its own blockchain.
Monero (XMR) aims to achieve the maximum possible standard of decentralization where a user does not need to trust anyone else on the network. It’s a completely fungible token that obscures every detail about senders, recipients, and the amount of cryptocurrency transferred. Unlike privacy coin competitors like Zcash, Monero is not selectively transparent. It leverages Ring Signatures to achieve complete privacy.
ZCash has a market capitalization of around $1.5 billion US dollars and it usually trades around the $130 to $150 price range. Like Monero, ZCash runs on its blockchain and does not use the Ethereum protocol. While Monero is known for offering complete anonymity, ZCash’s advantage is in its feature of optional anonymity.
You can choose to send ZCash (ZEC) funds in two ways. The transparent method of fund transfer happens similarly to Bitcoin: funds are transferred between public addresses and are recorded on an immutable public ledger. Users and participants of the network can see the addresses and the amount involved.
Shielded transactions, on the other hand, leverage the zK-SNARKS method and are completely anonymous.
Zcash is unique in its privacy coin family in that it gives users the option for privacy.
With market capitalization crossing half a billion dollars, Horizen (ZEN) is priced around $48 and $54. Operating on its blockchain, Horizen is unique in its use of a sidechain architecture that opens up possibilities for a host of diverse use cases. It allows for decentralized sidechains by which separate blockchains can run simultaneously while remaining pegged to the parent blockchain.
Horizen has a mission of making cryptocurrency as inclusive as possible and making an ecosystem where every participant will get rewards proportionate to their contribution. ZEN follows the Equihash consensus mechanism, uses secure nodes, and has TLS encryption to ensure secure inter-node communication.
With a market capitalization of over 2 billion dollars, Dash is currently priced between $211 and $226. The currency derives its name from Digital Cash. It runs on an open-source blockchain and aims to offer a fast and cheap decentralized network of global payments.
One of the most enticing aspects of DASH is that it offers a wide range of usage-mechanism to its participants. For instance, its InstantSend decentralized project governance mechanism allows for payments to settle instantly. With its Chainlocks feature, the DASH blockchain becomes instantly immutable, and its PrivateSend functionality offers optional privacy for users to choose during transactions.
The long-term vision of DASH is to become “the most user-friendly” and “scalable payments-focused cryptocurrency in the world.” DASH offers its services to both individuals and institutions. It caters to the international remittance needs of merchants, traders, and institutional users.
Final Thoughts: Honorable Mentions
Apart from these four top-ranking assets, the list of top ten privacy coins includes Verge (XVG), Private Instant Verified Transaction Cryptocurrency (PIVX), NuCypher (NU), Secret (SCRT), Phala. Network (PHA), Counos X (CCXX), Keep Network (KEEP), and the MimbleWimbleCoin (MWC.)
Privacy coins are an integral part of the crypto-economy because they can benefit otherwise legitimate users who don’t wish to make their transactions to be made public. For example, businesses often want to keep their clients, or the set of vendors they work with, a secret. Privacy coins enable businesses to leverage the blockchain while preserving their competitive advantage.
Although public wallets are viewable by anyone, privacy coins ensure that every transaction is mapped with a stealth address that can’t be traced back to the originator. Resultantly, the user feels empowered and gets to exercise his right to privacy in the fullest meaning of the term.
However, privacy coins also have a controversial bend. Outside of legitimate concerns for financial privacy, privacy coins also enable malicious actors to transact in silence. This is one of the primary reasons privacy coins are a focal point for regulatory agencies around the world.