What is Privacy Coin or anonymous coin? Are they legal? What coins are on the market? Let's find out through the following translation.
Bitcoin introduced as an alternative monetary system to government-controlled national currencies.
But some crypto advocates say it lacks the privacy features needed to protect users, especially in countries that ban or prevent the use of cryptocurrencies.
In fact, Bitcoin offers less privacy than fiat money in some respects because it is a public blockchain.
Note: Legal money (or identifier, fiat) is money issued by the government of a country, such as USD, EUR, VND...
Anyone with enough resources to parse the chain can uncover the real identity behind a public address.
Some controversial Privacy Coins like Monero and Dash have emerged to solve this problem by providing users with the ability to receive and send anonymously.
After that, many other anonymous coins also continued to be born.
Today, there are so many privacy-focused coins in the crypto market, that it can be difficult to choose which one is right for our needs.
Privacy Coins are increasingly in the sights of global anti-money laundering regulators due to their ability to facilitate money laundering and terrorist financing. Therefore it has been delisted by many exchanges.
This article will look at the top Privacy Coins and their distinguishing features.
What is Privacy Coin?
Privacy Coin is a cryptocurrency that promotes privacy and anonymity for transactions on the blockchain by concealing their origin and destination.
Some of the techniques used include hiding user balances and real wallet addresses, and mixing multiple transactions together to avoid chain analysis.
Because of their transparency, Bitcoin and other blockchains allow anyone to view public addresses and transactions within the network.
This makes tracking someone's deposits and withdrawals relatively simple.
However, Privacy Coin handles two different aspects which are anonymity and untraceability.
Anonymity hides the identity behind a transaction.
While untraceability makes it virtually impossible for third parties to trace transactions using services such as blockchain analytics.
How does Privacy Coin become anonymous?
To effectively maintain anonymity and traceability, Privacy Coin uses a variety of strategies, the most common of which include hidden addresses, ring signatures, CoinJoin, and zk-SNARK.
- Hidden addresses require the sender to create a new address for every outgoing transaction to avoid being involved with the recipient. Monero (XMR)—one of the top anonymous coins—uses a version of hidden addresses called double-key hidden address protocol (DKSAP).
- CoinJoin is known as a coin mixer as it combines transactions from different individuals into a single transaction. Then disburse them to the respective users using the new addresses.
- Zk-SNARKs allow crypto holders to prove the validity of transactions without disclosing information such as related parties and account balances.
Is Privacy Coin legal?
Yes and no.
The legality of Privacy Coin depends on the country. In South Korea, for example, the government bans anonymous money trading on the country's cryptocurrency exchanges to curb money laundering.
Some countries do not ban Privacy Coins nor endorse them. That creates a gray area in that country's laws.
For example, America followed a different path. They seek to develop tools to remove the "cloak" for transactions made on these anonymous networks.
Anonymous money transactions do not always promote malicious activities such as money laundering and terrorist financing.
Some users simply value their financial privacy. However, the number of countries wanting to control these anonymous, untraceable currencies is steadily increasing.
It is interesting that many famous individuals such as Naval Ravikant, Elon Musk, and Edward Snowden continue to advocate for privacy-focused apps.
Although Privacy Coins are not banned yet, they are making it difficult for countries and exchanges to share information from global organizations like the FATF.
Why is Privacy Coin still listed on some exchanges?
Delisting Privacy Coin is tied to a country's perspective.
While anonymous coin transactions can evade regulators, financial watchdogs have control over centralized exchanges.
When a regulator bans a particular cryptocurrency in its country, an exchange needs to halt trading as soon as possible or risk being shut down.
So some exchanges may choose to suspend trading while others will withdraw the coin from their platforms entirely.
Prior to this event, leading privacy coins such as Dash (DASH), Monero (XMR) and Zcash (ZEC) were delisted from many sizable exchanges including Bittrex, CoinCheck, Coinbase UK and ShapeShift.
However, some reports indicate that criminals still prefer Bitcoin, despite its lack of security features.
Dash is an anonymous coin that started as a version of Bitcoin in 2014.
It was first called XCoin, then changed to DarkCoin, then finally Dash. Dash contains optional anonymization features such as PrivateSend, which uses CoinJoin to hide the inputs of real transactions.
As a fork version of Bitcoin, transaction details such as balance and wallet address are public on its blockchain unless the user uses the PrivateSend option.
Dash vs Bitcoin
The main difference between Dash and Bitcoin lies in their consensus algorithms.
For example, while both use proof-of-work (PoW), Dash has an additional layer that stores masternodes powered by a proof-of-stake (PoS) mechanism.
Therefore, Dash can be considered as the best Privacy Coin in terms of ease of use due to its higher transaction speed and low transaction fees.
Additionally, Dash uses the InstantSend feature which makes transactions almost instantaneous.
Bitcoin lags behind in terms of privacy compared to Dash because Dash allows users to choose whether to trade publicly or not.
Dash vs Monero
Although both these cryptocurrencies have security functions. But they have fundamental differences in design.
Specifically, Dash uses a two-tier system that combines PoW with PoS. Furthermore, its anonymity feature is optional through the PrivateSend function.
Meanwhile, transactions on the Monero network are anonymous.
Dash uses CoinJoin while Monero uses a bunch of privacy-enhancing features, including ring signatures, RingCT, etc, making it harder to track than Dash.
Monero outperforms Dash when it comes to privacy, but DASH is a lot faster and cheaper than XRM.
Dash vs Zcash
Dash uses the X11 hashing algorithm while Zcash uses the zk-SNARKs mechanism and the Equihash algorithm.
They have some similarities, such as being forked versions of Bitcoin, a block size limit of 2MB, and a block confirmation time of 2.5 minutes.
When it comes to privacy, Zcash beats Dash because Dash's transactions can be tracked when one has access to the masternode.
Monero (XMR) is considered by many to be the best Privacy Coin on the market because it uses a lot of powerful features like RingCT, hidden addresses, and Ring signatures to promote total anonymity.
In fact, Monero's anonymity is so exceptional that the United States Internal Revenue Service (IRS) had to offer a bounty of over $600K to anyone who could crack its anonymity technology.
Monero vs Bitcoin
Besides operating on PoW consensus algorithm, the two have a few differences as follows:
When mining, Bitcoin mainly requires ASIC while Monero discourages the use of ASIC, which leaves CPU miners as the only option.
Additionally, Bitcoin uses the SHA-256 hash algorithm, while the protocol supported by XMR uses RandomX.
Furthermore, the Bitcoin network has a fixed block size, while Monero incorporates a flexible block size.
Launched in 2016, Zcash is another anonymous top coin that shares the same root as Dash, which is a fork version of Bitcoin. This cryptocurrency uses a high-power PoW mechanism to confirm transactions.
Zcash also offers the option to hide transactions through the secure and untraceable mechanism of zk-SNARKS.
Zcash vs Monero
First, Zcash uses the zk-SNARKs feature, while Monero combines hidden addresses, secret transactions, and ring transactions.
Zcash allows optional anonymity while any transaction on Monero is anonymous by default.
On the other hand, Monero developers believe that making privacy optional will weaken the anonymity of the private network.
Zcash vs Bitcoin
Zcash is a clone of Bitcoin but with additional features such as optional anonymity. Another difference between Zcash and Bitcoin is the block reward.
While Bitcoin miners take all the rewards “home,” Zcash miners only receive 80% in block rewards, with the remaining 20% given to funds including the Zcash Foundation.
Beam is an anonymous cryptocurrency that uses a new anonymous blockchain called Mimblewimble.
In addition to anonymity, this technology enhances the scalability of PoW protocols by providing compact data solutions for faster downloads and easier verification and synchronization.
Beam also offers untraceable transactions through non-identifiable addresses.
Launched in January 2019, Grin, shares the same Mimblewimble blockchain with Beam. This is one of the censorship-resistant and scalable Privacy Coins.
Grin separates itself by being independent of its anonymous founder. Therefore, incentives for developers come mainly from donations.
Notably, the platform has an interesting albeit controversial rule regarding mining. Miners receive the same reward rate regardless of time.
It means that the miner who joins in December 2030 will receive the same amount of rewards per block as the first miner in January 2019.
Anyway Privacy Coin has always been part of the cryptocurrency ecosystem, despite many controversies regarding criminal transactions.
While Monero has the strongest security features, Zcash and Dash offer the option of making transactions anonymous or not.
Beam and Grin are best suited for users who value scalability as well as anonymity.
So I just went through Privacy Coin.