When coins like Bitcoin and Ethereum were suggested as a replacement for regular money in 2009, very few people bought into the idea because of their pseudonymous nature which was considered unsafe for financial transactions.
Pseudonymous means that people don’t have to reveal their true identities while using bitcoin, they can create a new one.
This pseudonymity was an advantage and disadvantage to cryptocurrency and the blockchain. Regular people imagined that it was a risky venture to send money with Bitcoin when the identity used to receive it doesn’t exist in real life while crypto enthusiasts opined that since every transaction was recorded on a public blockchain. it was not private enough and needed to be more secure.
Some people would argue that regular money offers more privacy than Bitcoin because all the transactions on the blockchain are recorded and available to the public. Anyone with the right skills and tools has a chance of uncovering the identity behind a public address.
This need for total privacy was what brought about the development of privacy-focused coins. Coins that are capable of providing total anonymity for its users.
What are privacy coins?
Privacy coins are a type of cryptocurrency that perform private and anonymous blockchain transactions by shrouding their origin and destination.
The coins employ different techniques to keep users anonymous including hiding the user’s wallet balance and address, and mixing multiple transactions with each other to distort chain analysis.
Unlike Bitcoin and other regular cryptocurrencies, privacy coins do not have any form of transparency. They actively hide the source and destination of every transaction. Transactions with privacy coins are deemed anonymous and untraceable.
How do privacy coins work?
Different privacy coins work in different ways but one thing is constant, they all obscure transaction details like addresses and amounts so as to make it impossible to trace their transactions.
Some coins create a new, single-use wallet address for every transaction called a “stealth address.” The stealth address makes it impossible to trace multiple transactions to one wallet.
Other kinds of privacy coins make use of a tool called the zk-SNARK (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge). This tool employs advanced cryptography to encrypt transaction information on the blockchain.
Another set of privacy coins use a process called “CoinJoin.” CoinJoin works like a crypto mixer/blender in the sense that it pools different transactions together in a closed pool and executes them at the same time.
Are privacy coins legal?
The legality of privacy coins vary according to jurisdiction. Despite the possibility of being exploited for criminal activity, it is still legal in the US. Instead, the government is working on ways to successfully track the transaction data from it.
Privacy coins aren’t a terrible invention, the issue is that they make criminal activity easy with the lack of transparency and anonymity.
Most countries that didn’t legalise them haven’t banned them also hence they are still in use without fear. The South Korean government went ahead to ban the trading of privacy coins in order to curb money laundering via them.
Popular Privacy Coins
Dash was built in 2014 as a derivative from the first cryptocurrency, Bitcoin. Derivatives from blockchains are called forks. It is known as the first privacy coin and was first called XCoin, which later changed to DarkCoin, then finally Dash.
Dash uses the CoinJoin technique earlier mentioned to mask transaction details. However, as a Bitcoin fork, Dash isn’t truly anonymous. The CoinJoin feature is optional and can be triggered on and off depending on preference.
Monero is one of the most popular anonymous cryptocurrencies in the crypto market currently. It is also thought of as the strongest when it comes to masking activity as it uses more than two methods.
It combines stealth addresses and another method of batch transactions called Ring Signatures. Together, both techniques provide very strong anonymity for Monero users.
Monero’s privacy is so great that the United States Internal Revenue Service (IRS) had to put a bounty of roughly $625,000 for anyone who could crack its anonymity technology.
Just like Dash, Zcash is also a fork of Bitcoin. The privacy coin was created in 2016. Zcash uses the zk-SNARKS technology to hide transactions on the blockchain. The private transactions are optional and are called shielded transactions.
While the crypto industry keeps growing, a lot of things are bound to change. Privacy coins are an obvious example. From building and adopting an open, transparent system, humans now want more privacy in their transactions. Changes like this are not uncommon and bound to happen, it shows that the crypto industry is still new and there’s still a lot to be learnt and done.