Privacy coins: How Monero, Dash, and ZCash achieve true privacy

When cryptocurrencies were born, anonymous transactions and privacy were the main attractions. Even Satoshi Nakamoto, the creator of Bitcoin, is shrouded in mystery, as no one knows the true identity of this person or group. However, as usage time and scenarios develop, the privacy of cryptocurrency users continues to deteriorate. At many times, Bitcoin transactions are not anonymous, as the public distributed ledger provides perhaps the most transparent transaction data of any financial system to date. While there is no identity information directly attached to a crypto wallet, users still have to take many steps to ensure their privacy.

For the purpose of privacy protection, another category of cryptocurrencies has been introduced: privacy coins, also known as anonymous coins. Let's take a closer look at how they differ from Bitcoin and other cryptocurrencies.

What is a privacy-focused digital currency ?

As the name implies, a " privacy coin " is a cryptocurrency that ensures the privacy and anonymity of its users. In the simplest terms, privacy coins rely on the same blockchain technology as cryptocurrencies such as Bitcoin, but go a step further in how they handle information about transactions and obfuscate certain information. For example, Bitcoin transactions are all recorded on a public, distributed ledger that shows that address X sent address Y ____ BTC. Although there is no name on the wallet address, it is not difficult to link the address to a specific person through technical analysis and other means, especially when liquidating assets through licensed exchanges.

However, privacy coins hide information about senders and receivers during transactions through a variety of methods (examined below). Unlike Bitcoin transactions, privacy coins hide information about wallet activity, or at least only provide transaction information to the user.

Government attitude

Given the nature of privacy-driven cryptocurrencies, it’s no surprise that the emergence of privacy coins has attracted the attention of many government agencies. U.S. officials are already considering the possibility of imposing more regulations on privacy coins to prevent illegal money activity. Regulators are concerned that privacy coins could more easily facilitate money laundering and illegal transactions. It’s true that privacy coins , as well as other cryptocurrencies, have been used by bad actors in the past, but that’s only one side of the story.

First, about 75% of all cryptocurrency-based illegal activity investigated by the FBI was conducted using Bitcoin, not privacy coins, and the vast majority was conducted using Bitcoin. Most regulators have not considered outright banning cash and Bitcoin as a means of payment, and advocates believe officials should take the same approach to privacy coins.

Leaving aside the high-level debates about privacy, there are also many practical reasons to support the right to privacy, of which security is probably the most important. When public distributed ledgers publicly display wealth levels between wallet addresses, and these addresses are successfully linked to individuals, large holders of Bitcoin or other digital currencies become targets for hackers.

The Big Three of Anonymous Coins

Monero (XMR)

Perhaps one of the most well-known privacy coins, Monero was actually forked from Bytecoin in 2014. With Monero, both the sender and receiver addresses are kept private on the ledger, meaning there is no way to see the specific value of a transaction and the user's wallet. The Monero network protects user privacy by utilizing stealth addresses (a one-time address created by the sender for each transaction), ring signatures (a method that uses multiple signatures as a guide to obfuscated addresses to the sender), and ring confidential transactions, also known as "RingCT" (an improved version of ring signatures that hides the amount of XMR used in a transaction).

Monero further improves the privacy of transactions through a unique splitting mechanism. Each complete transaction is divided into different amounts and sent as a subset of separate smaller transactions that sum up to the initial amount. For example, if you want to send 1,000 XMR, the amount will be split into multiple different amounts, such as 200 XMR +150 XMR + 325 XMR + 275 XMR + 50 XMR, each with its own one-time address. Next, with the help of ring signatures, each individual transaction is combined with various obfuscated transactions, making the transactions almost untraceable.

Additionally, Monero has spend keys and view keys. Spend keys allow authorized users to make transactions on behalf of that account, while view keys allow authorized users to see the holdings of a specific account. This comes in handy when reporting holdings for tax purposes or auditing a company’s financial reserves.

Dash (DASH)

Unlike Monero, Dash is not designed for privacy as its sole purpose, but rather offers privacy protection for transactions as an option for users. The cryptocurrency was created through a fork of Litecoin and operates as a decentralized autonomous organization (DAO), with governance entirely in the hands of Dash holders.

Generally speaking, addresses and transactions are visible on the public Dash blockchain. However, users can utilize the PrivateSend feature to obfuscate transactions. Dash's X11 algorithm and improved POS mechanism use "CoinJoin" for private transactions.

Dash Masternodes (which always keep at least 1,000 Dash and use static IPs) further contribute to privacy and anonymity by taking Dash from transactions and mixing it with multiple other Dash sent on the network. The result is a series of split payments made simultaneously where it is impossible to decrypt the various inputs and outputs of a transaction, increasing anonymity. Dash provides block rewards to miners and pays fees to Masternodes for validating smart contract transactions.

Zcash (ZEC)

Zcash was created with the promise of enhanced privacy and security. Unlike Monero, private transactions are not required when using Zcash. Instead, users can choose to use enhanced privacy features to obscure transaction details and keep their transactions private using transparent wallet addresses or “shielded addresses.” To do this, Zcash utilizes zk-SNARKs, short for “zero-knowledge succinct non-interactive argument of knowledge” and zero-knowledge security layer (ZSL).

These two security mechanisms allow existing blockchain applications to support semi-transparent transactions, effectively allowing users to display a small set of data related to any transaction. It is used in everyday applications to verify that a payment was executed at a specific time. However, it obscures key user information in the process, including the total amount of the transaction and the personal information of both parties to the transaction.

Zcash has also established partnerships with several leading financial institutions and blockchain companies including JP Morgan, Parity, and StarkWare.

Privacy coins are a controversial topic around the world, but their use extends beyond darknet markets for illegal goods and services. Some see them as tools for nefarious behavior, others see them as fundamental principles of financial and personal privacy for law-abiding citizens. Regardless of one's stance, there are now more anonymous coins to choose from than ever before.