One of the greatest features of blockchain technology is transparency. However, this affects user privacy as most crypto transactions are recorded on public blockchains. Fortunately, privacy coins meet the demands of individuals who want to keep their transactions unknown.
Read on to learn about privacy coins, how they work, and which ones you can use.
What Are Privacy Coins?
Privacy coins are cryptocurrencies that reduce the traceability of transactions by hiding the amount transacted, wallet addresses, and/or wallet balance.
Private cryptocurrencies use blockchain technology like other digital currencies but with added privacy-enhancing features that obscure the origin and destination of the coins.
However, not all privacy coins guarantee complete anonymity; their privacy level depends on the coin’s protocol.
How Do Privacy Coins Work?
Privacy coins’ advanced privacy features set them apart from regular cryptocurrencies. These cryptocurrencies ensure privacy by providing anonymity (concealing user identity) or making transactions untraceable (obscuring transaction details).
Privacy coins employ the following cryptographic techniques to remain anonymous and untraceable:
- Stealth addresses
- Ring Signatures
- Zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge)
Stealth addresses use public and private key combinations to provide unique identifiers for every transaction. The transactions generate one-time new addresses every time you receive cryptocurrency to obscure your identity. Stealth addresses act like a proxy address on the blockchain and keep your public address hidden.
Ring SignaturesRing signatures are a type of digital signature that enables a user to complete a transaction by joining a group (ring) and generating a signature without revealing which member in the group did it. The members of the ring all have their own keys, and signing a transaction doesn’t need coordination from other members.
These signatures ensure permanent user anonymity, as they appear as if the group is executing the transaction. There is no way of knowing who in the group is the executor of the final transaction.
CoinJoin is a privacy feature where several users come together to mix their coins and execute a single transaction. The transaction output is returned to the participants in the original token amounts. In the process, addresses are mixed in the transactions, making the cryptocurrencies untraceable. CoinJoins obscure the sources and destination of digital assets and maintain user privacy and ambiguity.
Zero-Knowledge Succinct Non-Interactive Argument of Knowledge is a privacy technique that uses cryptography to prove that a transaction is valid without having to record the details of the transaction on a public blockchain. Zk-SNARKs keeps you anonymous and hides the details of your transactions, such as your wallet address and transaction amount.
Top 5 Most Popular Privacy Coins
Let’s look at the most popular privacy coins by market capitalization at the time of writing. Each privacy coin offers a different degree of privacy. This list does not constitute financial advice or endorsement.
Launched in 2014, Monero (XMR) is one of the most popular privacy-focused coins. Most consider Monero as the digital currency that offers the strongest privacy features compared to other privacy coins.
Monero uses several techniques to ensure user privacy, including stealth addresses, ring signatures, and RingCT. Monero’s privacy features are on default, and they cloak the sender and recipient addresses and transaction amounts.
Launched in 2016, Zcash (ZEC) is a fork of the Bitcoin network that is selectively transparent. The digital currency allows users to opt-in to transaction privacy features and selectively share transaction information and addresses. It utilizes Zk-SNARKs cryptography to ensure you can encrypt transaction information and conceal your identity.
Launched in 2014 as Darkcoin, Dash is a Bitcoin network fork that rebranded in 2015 to Dash. Dash users can utilize the PrivateSend feature to obscure transaction details through CoinJoin. The coin’s privacy features are optional.
Launched in 2018, Oasis Network (ROSE) is a privacy-oriented blockchain platform for open finance. It is a layer 1 Proof-of-Stake (PoS) network that combines a secure architecture with a scalable privacy-centric decentralized network. Oasis uses confidential ParaTimes to protect user data and maintain transaction confidentiality.
Launched in 2021, Aleph Zero (AZERO) is a privacy-focused Proof-of-Stake blockchain that aims to solve scalability and security issues in the blockchain base layer. It has a unique system structured around a Directed Acyclic Graph architecture. Aleph Zero uses zero-knowledge proofs to obscure user identity and transaction data.
Are Privacy Coins Legal?
Privacy coin legality depends on your location. For instance, privacy coins are legal in the United States but are banned from trading on exchanges in South Korea and Australia and completely banned in Japan. Private cryptocurrencies are under much scrutiny, and many mainstream exchanges have delisted them from their platforms to ensure regulatory compliance.
Privacy coins have come up as a solution to security issues that other tokens present regarding anonymity. However, it’s important to always do your own research before investing in any coins, including privacy coins.