What Are Privacy Coins, And Will They Be Able To Survive Regulation?

Monero (XMR), ZCash (ZEC), and DASH have been the leading cryptos offering on-chain privacy to various degrees, meaning users can hide transaction sizes and address balances.

Although Bitcoin and Ether work using pseudonyms, otherwise known as addresses, it is reasonably easy to cross-reference IP addresses or transactions to known entities. Those tracking services (chain analysis) are done by highly specialized companies, such as Chainalysis, Elliptic, and CipherTrace. Like it or not, governments and regulators are among their biggest clients.

The Privacy Coin Solution

However, privacy-centered coins offer a solution by implementing cryptographic techniques that obfuscate transaction details. There is currently no 100% untraceable service, but it makes tacking a lot harder for entities tracking blockchain data.

The same reason that regular users seek privacy coins has attracted hackers and scammers to demand ransom using some of those cryptocurrencies. This has triggered law enforcement and regulators to ban exchanges’ listing in some countries, including South Korea and the United Arab Emirates.

What Makes Privacy Coins Different?

The details vary between each blockchain, but the goal is the same: hide addresses and amounts on transactions. Monero uses a disposable stealth address, therefore making it impossible to trace transactions to previous addresses.

Another very clever technique is ZCash’s zk-SNARK “zero-knowledge”, where the sender proves that there is enough balance for the transaction and that he’s the owner of the respective private keys. Still, only the recipient can decode this message.

Lastly, there are “Ring Signatures” used by Monero, linking multiple user addresses to sign transactions anonymously. Therefore, external viewers can’t have certainty on who the signer effectively was. There’s a probability, but not a certainty.

What Privacy Does Bitcoin and Ethereum Offer?

CoinJoin is the standard non-native privacy service for Bitcoin and Ethereum. It basically mixes transactions for multiple senders and then disburses the coins across various recipients. Some wallets offer such mechanisms, including Wasabi Wallet and Samourai Wallet.

There’s no consensus on how reliable those mixing services are since they largely depend on a broad user base. Besides, there’s no way to know if a single entity controls 50% or higher inputs or outputs. In that particular case, the tool’s privacy is greatly reduced.

How Private is Monero?

XMR is the leading privacy coin, forked from Bytecoin in April 2014. Monero’s anonymity is so efficient that even computing the total number of coins in circulation is somewhat impossible. However, its fungibility is almost perfect as every single coin is indistinguishable and untraceable.

Those benefits are the main reason for Monero being the sole means of payment from some well-known dark web marketplaces.

How private is ZCash?

ZEC is a Bitcoin fork, and has even maintained the 21-million-coin limit, although offering the zk-SNARK confidentiality. However, unlike Monero, ZCash offers multiple transaction types with different privacy features.

While Monero’s founders remain anonymous, ZCash is developed by a for-profit company named Electric Coin Company.

How private is Dash?

Another Bitcoin fork, Dash was previously known as Darkcoin. Launched in January 2014, it offers an optional native CoinJoin service called PrivateSend. Relaying on Masternodes, otherwise known as validators, Dash’s privacy functions are usually questioned.

If the same entity controls enough validators, the entire Dash network privacy history could be severely compromised.

Will Privacy Coins Continue to Exist?

It is highly unlikely that the current privacy capabilities of Monero, for example, will be broken over the next decade. The higher governmental restriction for cryptos, the larger the demand for privacy coins.

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