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Do Privacy Coins Guarantee Privacy?

“Privacy coins” are cryptocurrencies that aim to solve one of the most intriguing issues in the crypto sphere: that is, how to hide the identity of users and the amounts of money they are transacting. During the current coronavirus crisis, when governments are instructing citizens to stay at home, (albeit for justified health reasons), and using cyber surveillance to enforce social distancing, the issue of privacy is becoming more important than ever. Anonymity is often associated with criminality, but in practice, it is needed also for various legitimate reasons.

Earlier this year, privacy coins gained special traction, when the Dash privacy coin doubled its price within a few days in mid-January, together with ZCash, another privacy coin, going up in price significantly. An example of the the explanation for the surge of privacy coins could be seen when in Venezuela’s collapsing economy, there was increasing demand for a relatively safe currency that would also allow its users to remain anonymous. However, privacy is also necessary even in quiet times, and the question is whether it can be achieved.

Businesses and individuals want to defend their data from competitors, governments or anyone else — much as we would not want anyone snooping in our bank accounts. However, while privacy coins are attempting to provide solutions to this, they are creating further challenges concurrently.

A Haven for Criminals?

It is difficult to collect evidence of the extent of delinquent activity, and this is even more the case vis-à-vis privacy coins. However, judging from their popularity in the dark market and various criminal investigations — it is clear that the underworld has adopted this route.

About a year ago, one case brought world attention to privacy coins. The wife of a Norwegian magnate was kidnapped, and the demand for ransom, worth 9 million euros, was set in Monero, the most popular privacy coin.

Criminal activity is not limited to privacy coins, or to cryptocurrencies in general — but is mostly carried out through fiat money. However, in order to tackle these accusations, privacy coins sometimes allow authorities a certain amount of access to their data, despite the fact that this weakens their anonymity.

How Truly Private is Bitcoin?

A common question that arises when dealing with privacy coins, is: “Why are they needed at all?” After all, to the general public, Bitcoin and other cryptocurrencies are perceived as anonymous, Yet, in practice, it is more accurate to describe Bitcoin as pseudo-anonymous.

Blockchain, the ledger which records all Bitcoin transactions (as well as other blockchains for other cryptocurrencies), is fully public as part of its basic structure. In each Bitcoin transaction, each user is identified with a public address, which is recorded on the blockchain. This address is a mixture of letters and numbers, yet, it is unique to each user and can be tracked by anyone with access to the public blockchain. While it may be difficult to identify the user of a specific address and track his transactions, it is far from impossible.

Furthermore, as regulated crypto exchanges need to meet compliance requirements, including Know Your Customer, there is another channel that might reveal the identity of crypto users — at least to law enforcement officials.

The possibly surprising bottom line is that even privacy coins are not always private. For technical and legal reasons, they may reveal some information about their users. Therefore, it is most accurate to describe them as projects that confront the privacy issue and offer a certain technological and economic model to solve the problem to some extent.

Major privacy coins

Monero

The largest privacy coin, with a current market cap of approximately 0.9 billion dollars, Monero ranks 12th among other cryptocurrencies. Launched in 2014, and named after the word “coin” in Esperanto, Monero is able to hide the identity of the sender, the receiver and the amount of the transaction. Unlike some of the other privacy coins, anonymity is forced and required. The addresses are hidden behind randomly chosen addresses, that are known and accessible only by the owner of the hidden address. The amounts of each transaction are mixed together with other amounts — so it would not be possible to track each one of them separately.

Dash

Launched in 2014 as a Bitcoin fork, and previously known as Xcoin or Darkcoin, Dash has a market cap of about 0.6 billion dollars. Dash offers a technology called “Private Send,” which combines different transactions, possibly more than once. This process is operated through a masternode, meaning that it must be trusted by the users. Another challenge to privacy comes from the fact that the “Private Send” is only optional, therefore, not all transactions in Dash are private.

Zcash

Run by a private company and with a market cap of about 300 million dollars, ZCash was launched in 2016. Privacy is optional, through a version of a technology named zero-knowledge proof. Addresses that are shielded can still be verified — but their users cannot be identified. The amounts of such transactions are known to the sender and receiver, but not to anyone else.

The privacy in ZCash is also challenged by a setup process that is required at the launch and during any fork of the coin. This setup creates a number that is used for the encryption of transactions. Despite the effort to erase this critical number after the setup, users must trust its participants.

Mimblewimble

Mimblewimble is a blockchain protocol technology, relatively new in the privacy arena, which has created two coins that were launched last year, Grin and Beam. Grin is operated by a group of volunteers, while Beam is run by a for-profit company. Transactions amounts are transparent only to the sender and receiver, but anyone can perform calculations with them. Combining various transactions helps to hide the identities of both the senders and the receivers.

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