Privacy coins: The sacrifice in the crypto mainstream

At the beginning of 2024, the privacy track has been hit hard by exchanges. First, OKX delisted tokens including XMR, DASH, ZEC, and ZEN, followed by Binance delisting XMR on February 20.

In the official reasons given by the exchange, Binance said that it "requires Monero deposits to come from a public and transparent address", while OKX "touches the offline rules and may have high-risk projects."

The real reason these privacy coins were taken offline is that exchanges needed to “avoid regulation.”

This is not the first time that an exchange has delisted privacy coins. Binance has delisted privacy coins in some regions, and exchanges have collectively delisted privacy coins in South Korea, etc.

The removal of privacy coins from exchanges will undoubtedly reduce the liquidity and availability of privacy coins. The removal of privacy coins more fundamentally reflects that the crypto industry is offering privacy coins as a surrender to regulators.

What ordinary users need to reflect on behind this phenomenon is: Is the demand for privacy a real demand? In addition to regulatory factors, have privacy tokens been abandoned by the market? And what is the development of the privacy track behind privacy tokens?

Privacy needs are real needs

As the most accepted token in the crypto industry, Bitcoin is not completely anonymous. Bitcoin is a public centralized ledger, and user addresses and balances are completely transparent on the chain. In other words, once a user's corresponding Bitcoin address is known, all transactions on the chain are traceable. In the industry, it is a common practice to profile users and monitor the flow of funds by tracking and monitoring Bitcoin chain transaction data.

The spirit advocated by Crypto during its creation period is to make transfers private.

Therefore, in response to this cryptographic spirit, privacy tokens were created. For example, Monero, which was born in 2014, is a typical token that meets the privacy needs. In the eyes of some geeks and anarchists: when facing political sanctions, the privacy of assets is very important, and Monero protects privacy through ring signature technology, hidden addresses, ring confidential transactions, etc., thus achieving completely private transactions.

It's not just privacy coins. Similar mixers like Tornado Cash are favored by some whales. Some sophisticated whales use it regularly to hide their asset status.

According to Rootdata data, there are currently more than 120 privacy technology-related projects, involving Layer 1, layer 2, privacy coins, mailboxes, Defi, mixers, DID, VPN, social, privacy address wallets, etc.

For example, there are well-known privacy address tools such as Umbra, privacy public chains such as Secret, Aleo, and Mina, Layer2 such as Manta and Starknet, etc.

Moreover, mainstream tokens like LTC also favor privacy technology. Privacy technology has been booming in recent years, and mainstream VCs are also optimistic about the privacy track. In the eyes of VCs, privacy is a track that has accumulated a lot of experience and has been sought after by VCs such as A16z, Binance Labs, Samsung Ventures, and Sequoia Capital in recent years, with a track valuation of billions of dollars.

Regulatory dilemmas facing the privacy sector

Although it has real applications in the privacy track and has been developing steadily, and capital is optimistic about it, but a big tree attracts the wind, and supervision has never left.

Privacy coins are the first to be affected. Because of the characteristics of privacy coins, they are often seen in dark web crimes, money laundering, extortion and other criminal activities. It is also because of the application of these black and gray industries that privacy coins are often identified by governments as aiding in money laundering. The removal of privacy coins from centralized exchanges is actually a move by the exchanges to comply with regulations, or to surrender to the regulators.

According to a 2020 report, Australian regulators and banks encouraged cryptocurrency exchanges to remove Monero from their listings, otherwise they would face the risk of "disconnection from banking services." Dubai also banned the use of Monero under its digital asset regulatory framework. Monero is also banned from entering exchanges in Japan and South Korea in order to curb money laundering and reduce organized crime.

In June 2018, Japan issued a self-regulatory plan for the Cryptocurrency Exchange Association, prohibiting the trading of anonymous currencies. Then in November 2018, the Financial Services Agency of Japan issued new standards for cryptocurrency exchanges, which explicitly prohibited cryptocurrencies with high anonymity and easy to be used for money laundering. South Korea was two years later than Japan. In November 2021, it issued a legislative notice on the implementation regulations for the legislative amendments to the Specific Financial Information Act. According to the implementation regulations, virtual asset service providers will be prohibited from trading anonymous coins and handling virtual assets with money laundering risks, which also means that all anonymous coin assets will withdraw from South Korea.

Forced by the regulatory policies of various countries, as early as May 31, 2023, before this comprehensive removal, Binance announced that it would stop providing 12 privacy coins including Monero, Zcash, Dash, etc. to users in the four EU member states of France, Italy, Poland and Spain.

Not only privacy coins, but other protocols and applications in the privacy track have not escaped. In 2022, the privacy application mixing protocol Tornado Cash was sanctioned by the United States. The results of the sanctions are mainly the following: Tornado Cash is regulated, and the founder's Github account, project code library, website domain name, USDC contract, and RPC service (originally provided by Alchemy and Infura) are all banned.

It can be seen that the biggest problem facing the privacy track is regulation, and the most direct problem of regulation is that these privacy products are less accessible. However, for users who have a strong demand for privacy products, they will still obtain the product through other channels. But the problem is that there does not seem to be that many users who have a strong demand for privacy coins.

Privacy coins are not the only option for meeting privacy needs

For privacy coins, perhaps the biggest threat is not regulation, but other products on the track.

First, mainstream tokens entered the privacy track and gave them privacy functions. For example, in 2022, Litecoin MimbleWimble was implemented, and users can choose to send confidential Litecoin transactions, where the amount sent is only known to the sender and the receiver, and MWEB addresses are allowed to hide account balances. However, it was the upgrade of this function that also led to Litecoin's delisting in South Korea because this function did not comply with South Korea's anti-money laundering regulations.

In an article published by Vitalik at the end of 2022, a privacy solution for Ethereum was also proposed. The EIP-5564 protocol on Ethereum, also known as the privacy address proposal, was proposed. A stealth address is a one-time wallet address that gives ownership of a user's assets without exposing any wallet address or user identity. Stealth addresses also enable the recipient of a transaction to remain anonymous, thereby preventing any connection between the sender and the recipient's identity that is publicly visible on the blockchain.

The Ethereum ecosystem has been using Zk technology to promote privacy protection. Vitalik once emphasized that ZK-SNARK will be as important as blockchain in the next ten years, and the highly anticipated Ethereum Layer2 built on ZK technology has also been released in the past two years.

It is conceivable that as mainstream coins embed privacy features, they will have a wider audience than privacy coins.

The technology at the privacy level has been improving. Currently, there are four mainstream privacy technologies in the industry, namely zero-knowledge proof (ZK), trusted execution environment (TEE), secure multi-party computing (MPC), and homomorphic encryption technology (HE). General privacy public chains are based on the above four technologies. Among these four technologies, ZK, MPC and HE are privacy technologies based on cryptography, and TEE is based on hardware design.

Zero-knowledge proof provides a way to cryptographically prove knowledge of a specific set of information or data without revealing the specific details of the set of information or data. This technology is widely known in the industry through Ethereum's ZK-rollup. There are currently many ways to implement zero-knowledge proof, such as ZK-SNARKS, ZK-STARKS, PLONK, and Bulletproofs. Each method has its own advantages and disadvantages in terms of proof size, prover time, and verification time. For example, the privacy protocol Tornado Cash uses zero-knowledge proof.

The trusted execution environment can provide an environment that is isolated from the mobile operating system to protect the user's sensitive information. This is also the most mature technology today, and its main applications include Secret Network and Oasis Network.

Secure multi-party computing is a method where multiple participants use private data to participate in confidential computing and jointly complete a computing task without disclosing their private data. This technology can meet people's needs for confidential computing using private data, and effectively resolve the contradiction between the "confidentiality" and "sharing" of data. At present, in the field of MPC, the main technologies used are key technologies such as secret sharing, oblivious transmission, obfuscated circuits, homomorphic encryption, and zero-knowledge proof. At present, in the industry, the most widely used area of ​​MPC technology is still in wallets and asset custody.

Homomorphic encryption technology focuses on data processing security and provides a function for processing encrypted data. In other words, other people can process encrypted data, but the processing will not reveal any original content. This technology is used on some public chains. Fhenix, a confidential blockchain driven by homomorphic encryption, received a seed round of financing of US$7 million last year. This is one of the public chain solutions that institutions are more interested in after the ZK craze.

It can be seen that privacy technology has actually been embedded in all aspects of the crypto ecosystem. For users, privacy tokens are not the only option to meet their privacy needs.

The era of privacy coins is over, but the privacy track is not

The concentrated development of privacy coins was from 2014 to 2017. The projects and technologies have matured, there are basically no technical barriers, and the competition among privacy coins is fierce.

However, for ordinary users, the technical threshold for its use is still relatively high, and its popularity among crypto users is low. Moreover, the demand for privacy is not accepted by the market, and coupled with the siege of supervision, privacy tokens are indeed not so popular, and they are slowly becoming a toy for a small group of geeks.

Dr. Duncan S. Wong, the core technology developer of Monero, once said that absolute privacy tokens will no longer be popular, and cryptographic tokens that provide complete privacy to the public and individuals and accountable privacy to regulators and auditing agencies will gradually become mainstream.

Even in the dark web market, the most mainstream transaction currency is still Bitcoin. In real applications, people are actually more willing to use mixers like Tornado Cash to hide their transaction behaviors and wallet addresses, because this allows users to use their commonly used mainstream currencies to trade, rather than privacy coins that are difficult to use and have poor liquidity.

Moreover, most of the users who hold privacy coins do not use the tokens to meet their privacy needs, but are optimistic about their high growth potential in the future. However, mixers are different, and all users are those who want to meet their privacy needs.

From this perspective, privacy coins are not an economical and practical option for users to meet privacy needs. After all, the cost of privacy coins meeting privacy needs is shared by all coin holders.

Privacy coins are becoming a victim of the industry's efforts to make cryptocurrencies mainstream. Facing the development of cryptocurrencies, regulators cannot do nothing, and the crypto industry has introduced privacy coins. This can be seen from the fact that centralized exchanges have removed privacy coins one after another.

Things that are geeky enough will not be widely accepted by the public, not only in the field of cryptocurrency, but also in other aspects of the real world.

Privacy coins may become a sacrifice in the process of the crypto industry moving towards the mainstream, but crypto technology will not stop developing and it will definitely be applied to crypto projects. The privacy track is still one of the important tracks in the industry.