June 10, 2022
As cryptocurrencies continue to gain popularity, further efforts are being made to increase the security and anonymity around them. One solution has been the introduction of privacy coins, a sector created with privacy and anti-traceability in mind.
What Do You Need to Know about Privacy Coins
Privacy coins are a form of cryptocurrency designed to hide transaction information. On public blockchains, the sender, receiver, and amounts involved are accessible to the public; but with privacy coins, only the parties involved in a transaction will know who is involved, and who sent what.
For people looking to keep their comings-and-goings shielded from the transparency traditional Bitcoin employs, privacy coins are a compelling marketplace option.
In fact, privacy coins like Monero have doubled in market value since 2019. Dash has doubled its price in the last year and a half, and Zcash’s price has tripled in the same amount of time. This kind of market share shift is indicative of a growing demand for secure and safe private transactions, and many believe privacy coins are the mechanism up to the task. We will cover each coin below.
How Privacy Coins Stay Private
Different privacy coins use their own methodology to stay secure and anonymous. The most common privacy coins are Zcash, Monero, and Dash, as introduced above. Let’s take a look at the differences of the three and examine how each coin positions itself within the competitive cryptocurrency market.
Zcash (ZEC) is a popular privacy coin that offers both transparent and private transactions. Their private transactions use the concept of “zero-knowledge proofs”, a calculation that will confirm to a network the validity of a transaction without offering information on the transaction itself.
Zcash was the first coin to offer zk-SNARKs, which is short for “Zero-Knowledge Succinct Non-Interactive Argument of Knowledge”. Put more simply, zk-SNARKs are a novel (and the strongest, according to Zcash) iteration of zero-knowledge proofs. They keep your data secure through a system that they claim has the potential to be near limitless: “Theoretically, you can use a zk-SNARK to verify any relation without disclosing inputs or leaking information.”
For best results, this coin should be mined using application-specific integrated circuits, a type of circuit chip with a single-minded purpose.
Monero (XMR) uses the stealth address technique to shield transactions. Defined as one-time random addresses for individual transactions, Monero makes tracing exceptionally difficult with a process some liken to burner phones – one-and-done interactions mean assured privacy and security.
They simultaneously use ring signatures, a process that mixes the sender’s actual identity with dummy identities. RingCT, used since 2017, is an additional layer that allows for “hidden amounts, origins and destinations of transactions with reasonable efficiency and verifiable, trustless coin generation,” according to Monero’s website. Plus, Monero is private by default, setting them apart from other privacy coins.
Another major advantage of this coin is in its scalability. By using a free block size mechanism, there’s no artificial limits in place, as seen with Bitcoin’s controversial one megabyte restriction. This kind of free-market ideology is what makes privacy coins appealing to users looking to do more with their everyday exchanges.
Dash is best known as being the original privacy coin. It is primarily based on PrivateSend, an advanced form of CoinJoin. PrivateSend protects user privacy by mixing various recipients’ transactions together before releasing them back to the blockchain. The involved parties then get the same amount of back, this time untraceable.
Dash has become especially popular in countries struggling with massive inflation, as coins like Dash offer better buying power in addition to being ultra-fast and secure. The worldwide potential of coins like Dash is not lost on the exchange community – with the world becoming more interconnected than ever, a player coming into the picture to offer perks to people outside the United States and Europe is seen as a positive for the future health of the space.
In those more stable countries, Dash takes the same consumer-centric approach; marketing themselves as a convenient and modern way to buy groceries, pay rent, and loan to friends. This strategy is important because it marks a trend towards appealing to your average crypto enthusiast, in an effort to grab market share from traditional options.
Why Were Privacy Coins Created?
A key reason for the rise of privacy coins is because of the relative transparency in the rest of the crypto sector. For Bitcoin, information like the sender, receiver, and the sent amount is accessible to the public. Those looking for less traceability and more anonymity sought a solution – like privacy coins.
The most ardent supporters of privacy coins cite ‘the privacy problem’ – there is a decreasing anonymity of your average citizen, and it harms society. With public social media profiles, credit bureau data hacks, and outdated computer security systems commonly used in first-world countries, people are more public than ever – sometimes without their consent.
On a larger scale, some organizations prefer to use privacy coins to keep their business away from the general public. Big business breeds a need for extra security, and privacy coins were developed in part as a direct response to enterprise needs.
Legality of Privacy Coins
Privacy coins have been a subject of controversy since their introduction. While legal in the United States, the governments of Japan and South Korea have banned them, citing their potential for unscrupulous activities.
A few exchanges have put policies in place to eliminate privacy coins as well. Notably, Brittex dropped Monero and Zcash in 2021, and Kraken delisted Monero in the United Kingdom over regulatory issues.
The main point of contention is in regards to what some consider the coin’s biggest asset: it can’t be traced. Critics cited the potential for money laundering, for example. When there’s no trace of a transaction, authorities have an exceedingly difficult time tracking bad actors.
Still, privacy coins are growing in popularity. Users crave privacy and free-range in a sector that has traditionally not offered that, and as such, it is likely coins like Monero, Zcash, and Dash will continue to see upticks in use around the world.
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