What Are Privacy Coins

Ivan Skladchikov
June 16, 2020
What are privacy coins

Privacy coins that ensure complete anonymity are rather popular despite the strong regulatory resistance they face. In this article, we will explain what privacy coins are, who may need them, and for what. Also, we will give you a brief overview of the top privacy coins, including Monero.

What Are Privacy Coins

Privacy coins (also known as privacy-focused coins) is a special type of cryptocurrency that hides all the data about your transaction, including the addresses of the sender and receiver. It makes these coins stand apart from Bitcoin and other pseudo-anonymous cryptos.

Pseudo-anonymity means that you can send and receive money without revealing your real-life identity. But if the BTC address you use is somehow linked to this identity, it becomes possible to trace your crypto activity and determine who stands behind it. Especially, if you use the same address for many transactions and convert crypto to fiat.

Monero and other privacy-focused coins seek to turn this pseudo-anonymity into complete anonymity. With them, your transactions remain totally private. At least, that’s the idea.

The top privacy coins compared in terms of market cap and other metrics. Image source: BRAVE NEW COIN

Privacy Coins in 2020: The Champions

Currently, there are dozens of privacy coins available on the crypto market. You have probably heard about Monero, Zcash, Dash, Verge, Zcoin, Grin, Horizen, and NavCoin. They all belong to this category. 

Privacy coins may use different technologies and algorithms to ensure 100% confidentiality of both parties involved. Let’s consider four market favorites in more detail to understand what they offer.

Riccardo “fluffypony” Spagni, the Monero Lead Maintainer. Image source: BitsMedia

Monero

Market cap: $1,176,381,025
Ticker: XRM

Monero (XRM), the leader of the sector, was born in 2014. Interestingly, most of the team behind this project remains anonymous. The only public personalities are Riccardo “fluffypony” Spagni and Francisco “ArticMine” Cabañas.

Monero markets itself as a coin “with a focus on private and censorship-resistant transactions”. Due to the special cryptographic algorithm called CryptoNight, it obfuscates (i.e. hides) the amount sent and the addresses of both parties.

Another advantage of Monero over Bitcoin is that XRM can participate in any transaction without running the risk of being “tainted”. (“Tainted” means that the coin took part in a criminal transaction and therefore has a bad history attached to it). Thus, Monero users can be sure the XRMs they move will stay clean, no matter what their intentions were. Therefore, no bad rep can prevent a coin from being accepted later. This is what the developers mean by saying that Monero is “censorship-resistant”.

The Zcash website’s main page.

Zcash

Market cap: $476,239,104
Ticker: ZCASH

The developers describe ZCASH as “a privacy-protecting digital currency built on strong science”. Like Monero, Zcash protects your personal and financial info. The main difference between the two is that Monero uses its own algorithm while Zcash is a fork of BTC applying a special zero-knowledge protocol called zk-SNARKS. (By the way, Z in the name of this coin stands for Zero).

Without going deeper into technical details, “the zero-knowledge proof” is a mathematical method that makes it possible to verify a transaction without sharing or revealing the info about it. However, if a user wants to share some relevant details, he can disclose them voluntarily. Also, Zcash supports transparent transactions. Have nothing to hide? Then, you can select this option.

DASH coin focuses on usability and speed.

Dash 

Market cap: $736,272,190
Ticker: DASH

Dash is a Litecoin’s fork “with benefits”. These additional features are anonymity and high speed. According to the developers, Dash “moves money anywhere, to anyone, instantly, for less than a cent”. Therefore, this privacy coin concentrates on the convenience of use. It fits well with the name that means “digital cash”.

The distinctive features of DASH are InstaSend and PrivateSend technologies and the validation system consisting of 2 tiers. On the first tier, there are nodes, like in the Bitcoin network. They are individual users/devices that can communicate with each other and do mining.

On the second layer, there are masternodes — the selected group of users, each holding no less than 1,000 DASH. These masternodes have two main functions, apart from storing a full version of the DASH blockchain. First, they take part in the instant confirmation of transactions (InstaSend) and their anonymization (PrivateSend). Second, masternodes participate in the decision-making process and vote for changes that may positively impact the DASH ecosystem.

A block reward is split between the miner (45%) and the masternode (45%). The remaining 10% goes to the DASH “treasury”. This fund is necessary for maintaining and further developing the network.

Verge coin: “a user-friendly cryptocurrency built for everyday transactions”.

Verge 

Market cap: $73,774,294
Ticker: XVG

Verge is a cryptocurrency “designed for people and everyday use”. As any privacy coin, Verge enhances Satoshi’s original idea to provide people and businesses with a decentralized financial tool — fast, cheap, and secure. Unlike BTC, it offers stronger privacy.

Verge is a fork of Dogecoin (DOGE), famous for its funny logo with a Shiba Inu dog. Its original name (Dogecoin Dark) changed for Verge in 2016, for marketing purposes.

Unlike Monero developers, Verge team supports the idea of “optional privacy”. As the name suggests, a user can choose between a 100% private transaction and a regular pseudo-anonymous one. If you prefer complete anonymity, use the first alternative to hide the amount spent, and the info about the sender, receiver, and coins involved.

The project is 100% open-source and “run entirely by volunteer community”. While the Verge ledger itself is transparent, all the personal data and communication between the users are well protected due to built-in Tor integration.

Monero website offers a list of merchants and services, accepting XRM. 

Privacy Coins: Legal Use

As privacy coins have a controversial rep, the first use-cases coming to mind are money-laundering and all sorts of illegal trade. But there are many potential applications, beyond these practices. For instance, we can use Monero-like coins for:

  • Personal protection. There are many reasons why you may want to hide the amount you hold, send, or receive from others and keep your financial activity secret. After all, privacy is one of the libertarian values the blockchain technology stands on.
  • Business info protection. As more and more businesses start to accept crypto as payment, privacy issues become increasingly important. For instance, as all the transactions are available for viewing, your clients can get a general picture of how your business is doing and see how much others pay for the same product. If you apply the differential pricing method, some of your clients may feel they pay more than others and demand equal conditions. Privacy coins prevent such uncomfortable situations, hiding your ledger from prying eyes.
  • The citizens of “surveillance states” might use privacy coins to support the communities that oppose the system, political dissidents, or counter-culture groups. Of course, we are not talking about financing terrorists. Rather, we refer to some social activities that totalitarian or religious authorities consider unbecoming, unpatriotic, or undesirable.
The properties of the main privacy coins and BTC compared. 

Privacy Coins: Pros

Here is a brief list of privacy coins pros:

  • These coins are in full compliance with Satoshi Nakamoto’s ideas. As we know, anonymity was one of his top priorities. It explains the fact why his real-life identity remains undisclosed.
  • They protect your financial privacy.
  • Also, they protect the privacy of the people you deal with, financially.
  • They protect your reputation, in case your activity may cause social or political disapproval (coming from authorities, clients, partners, etc).
After Japan banned Monero, many big exchanges delisted this and other privacy coins. Image source: CryptoGazette

Privacy Coins: Cons

These three important advantages are balanced with several no less important cons:

  • Regulatory resistance. Regulators all over the world have their reasons to dislike privacy coins, seeing them as a criminal tool. For instance, Japan, one of the crypto-friendliest states, imposed a ban on the major private coins, including Monero. After it, delisting these coins has become a trend on the Asian crypto exchanges.
  • Some experts say that private coins are not 100% private and even Monero transactions can be traced. It may happen due to some vulnerabilities in the system, as no coin is perfect. But in the case of a privacy coin, this imperfection can get a user in trouble, as he is 100% sure that his activity is shielded.
  • In the case of DASH, a limited number of wealthy users control the network, making it less decentralized. Some critics point out that, as DASH transactions get anonymized on the masternode level, their details may bу seen by those running these nodes.
  • Unfortunately, the coins like XVG or XRM have their image somewhat tarnished. For example, Monero is associated with the WannaCry ransomware attacks, and Verge hit the headlines due to its cooperation with PornHub. Though we cannot blame a coin for being used by bad guys, every scandalous incident casts a shadow on it.

What Are Privacy Coins: Future

It’s rather difficult to predict what to expect. The optimists believe that private coins will be in great demand in the future when many governments will be trying to control their citizens using mass surveillance tools. Monero and friends may give people an opportunity to bypass Big Brother’s bans and protect their privacy.

Their opponents argue that the demand for privacy coins will decrease for the same reason, as governments and regulatory bodies will be “tightening the screws”.

Potentially, each of these scenarios can be implemented.

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