Privacy has been associated with cryptocurrencies since their inception, and regarded as a valuable trait among for those that wish to have some financial privacy. For coins like Bitcoin and Ethereum, you are easily able to see a wallet address and all the transactions associated with that address. Now, there are of course no names attached to an address, but it is not quite difficult to see the transaction and payment history once a name has associated with an address.
Governments have been developing their own systems for tracking cryptocurrency transactions, to protect against illict money activities. Even though around 75% of all cryptocurrency-based illegal activities investigated by the FBI were based on using Bitcoin, governing bodies nonetheless feel the need to implement regulations against privacy-focused coins.
With the increasing number of sensitive data leaks, and even giant payment processors like Visa and Mastercard being hacked for credit card details, it comes as no surpise that nowadays people want to protect their privacy online, especially when it comes to their finances and why privacy coins have become so popular.
As implied, a privacy coin is a cryptocurrency that allows its users to hide their transaction history and keep their anonymity. In the early days of cryptocurrencies, most if not all coins were considered to be private, as there were no names attached to an address, unless you specifically attached a name to one. With the technology evolving and more and more peeple and institutions becoming interested in this space, transactions have become easier to track, and an address that is stored on an exchange can be easily associated with a username or email address.
Privacy coins conceal information about senders and receivers through numerous methods, but probably one of the most important features is safety. Most coins operate on an open ledger, which publicly displays the level of wealth a wallet has, and if that address is successfully linked to an individual, then the holders becomes a target for hacks or even worse. In the past few years, the number of cryptocurrency robberies has increased dramatically, with criminals targeting well-known crypto traders.
Now that we know what a privacy coins is, let's analyze some of the most popular privacy cryptocurrencies and see how each of them handle the privacy issue.
By far the most well-known privacy coin, and soemtimes labeled as the "King" of privacy, Monero started as a fork of Bytecoin in 2014. A big difference between Bitcoin and Monero is that Monera keeps the addresses of the sender and receiver private on the ledger, meaning there's no way to see the value of a user's wallet.
The Monero network has 3 main features to protect user privacy:
Another interesting aspect of Monero is that to further icnrease the privacy of transactions, it employs a unique splitting mechanism, meaning that the full amount of a transaction is split into different amountand sent as numerous, smaller transactions which add up to the total initial amount. As an example, think that you want to send 500 XMR. The transaction would be divided into separate amounts, let's say 100 XMR, 200 XMR, 50 XMR, 85 XMR and 65 XMR, all of them receiving their one time address. Now with ring signatures, each of these smaller transactions is combined with decoy transactions, making it nearly impossible to trace.
DASH came to be as a fork of Litecoin, and functions as a Decentralized Autonomous Organization (DAO), where the governance system is ran by the token holders. DASH's main focus is not privacy, but it does give its users the option of protecting their transactions.
DASH features a public blockchain, and all addresses and transaction are viewable on the ledger. Users have the option of using the PrivateSend feature to hide transaction details whenever needed, which functions similarly to Monero's transaction mixer, meaning that the coins you are sending are mixed with other coins sent on the network, which are sent simultaneously, rendering it impossible to know the inputs and outputs of a transaction. The DASH Masternodes ( available to those that hold a minimum of 1,000 DASH tokens and set up their wallet to become a validator node) play a crucial role in ensuring a transaction anonymity, and miners use a Stake X11 mining algorithm with "CoinJoin" to mix transactions together.
Created to be an alternative to Bitcoin, but with added privacy and security features. To obfuscate transaction details and keep transactions private, Zcash utilizes zk-SNARK (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge) and the zero-knowledge security layer (ZSL). Users that want their privacy protected can use either a transparent wallet address or a shielded address, which allows very little personal information to be displayed on the public ledger, and hides the amount sent and addresses of the sender and the receiver.
The Zcash foundation remains compliant with regulatory bodies, and collaborates with exchanges where AML/KYC controls are applied the moment ZEC is exchanged for fiat. Their mission is to help law-abiding citizens protect themselves from bad actors. Surprinsingly, Zcash has created a partnership with leading financial institution JP Morgan.
Despite often times being associated with criminal activities on the darkweb, privacy coins have become very popular among the average cryptocurrency user. Some regard them as tools for illicit acts, or wanting to evade taxes, while others regard them as basic principles of financial and personal privacy, principles that today's financial institutions do not take seriously. Regardless of which category you fall into, privacy coins have already established themselves in the cryptocurrency space, and there plenty to choose from, with more being developed every month.