Anonymity is a common element in the crypto space, and this is why it has attracted both individuals and brands. Regular cryptocurrency has the advantage of anonymity, which allows users to transfer tokens from one address without their identity being known, but there is a snag. Transparency is a feature in blockchain technology, where anyone can check the transactions linked to an address, and monitor the account’s data. This, sometimes, defeats the anonymous features of cryptocurrencies.
This article analyzes privacy coins and how they function in the space.
What are Privacy Coins?
Privacy coins are coins designed to preserve the anonymity of transactions that occur in the blockchain. This type of cryptocurrency makes it a Herculean task to detect the sender and receiver. Coins like the aforementioned cloak transactions, making it difficult for outsiders to decipher the financial activity.
Is every cryptocurrency a privacy coin?
Though blockchain may be created to offer anonymity to users, people can easily track the transactions linked to an address. This can be viewed on different explorer websites. For instance, to find out transactions linked to an Ethereum address, and Solana address, the crypto enthusiast can utilize Etherscan and Solscan respectively.
Everything linked to the address, from the number of tokens that it possesses to the previous receipts and transfers can be viewed seamlessly.
Regular cryptocurrencies like Bitcoin are not privacy coins, as transactions can be viewed on public blockchain explorers. Blockchains like Bitcoin come with upgrades that improve the privacy of some transactions. For instance, Bitcoin has the Taproot functionality that adds privacy by using advanced smart contract transactions that give the facade of normal transactions. This feature is used by only a few developers, at the moment.
Another way that Bitcoin transactions can be anonymized is via the usage of coin mixers. Coin mixers or tumblers randomizes the bitcoin transaction of a user with others that are utilizing the feature. This makes it difficult to track the exact Bitcoin transactions to a wallet address.
Once the mixing process ends, the protocol sends an amount of the randomized cryptocurrencies to the chosen recipient. An example of a coin mixing service is CoinJoin.
How do privacy coins work?
Privacy coins function as a result of some techniques that incorporate privacy into transactions. Some are as simple as using stealth addresses, while others use advanced techniques like Coinjoin methods.
Coinjoin
Coinjoin is a system, where the tokens sent from multiple sources are mixed and sent as a single transaction before they are distributed to the recipients. This is a way of achieving the privacy by cloaking the identity of the sender, as people do not know who sent the token to an address since they are mixed. Dash employs this feature.
zk-SNARKs
zk-SNARKS or Zero-Knowledge proofs allows users to transfer tokens while hiding their identity, the amount being transferred, and the recipient. Transactions are verified without any private details being shared. Zcash uses this element.
Stealth Addresses
Stealth addresses are used by Monero to cloak the details surrounding transactions. It also utilizes an advanced dual-key protocol that created a stealth address for every transaction. A stealth address is a password-protected anonymous address that changes for every transaction.
What are the examples of Privacy Coins?
Some cryptocurrencies were designed to heighten the privacy and anonymity of transactions occurring across different networks, meaning that people do not need to utilize mixing services before they can attain their goal.
Monero – XMR
With the transparency of the average cryptocurrency, there was the need for a high coin that masked the transactions of users. This was one of the major reasons that Monero was conceptualized and became popular after it was released.
Monero achieves its privacy through the usage of stealth addresses and ring signatures. Both the identities of the sender and receiver are hidden. Another detail that is cloaked is the transaction amount via the Ring Confidential Transactions, or RingCT.
When money is sent to an address, the recipient can’t find out the source, except the sender discloses the information to them. People can’t access a blockchain explorer website on Monero to see the transactions linked to an address. No one can figure out the data linked to the time, amount, sender, and receiver of the money.
Zcash
Zcash or ZEC believes that it is the improved version of Bitcoin with high security and privacy, taking the form of the “https of Bitcoin.” Zcash was created in 2016 when developers believed that it was paramount that the updated version of Bitcoin was made, but with better functionalities. Its creators developed it as a fork of Bitcoin. To achieve anonymity, Zcash uses the zk-SNARK security protocol, ensuring that transactions are validated without private details being exposed or accessed by others.
Every detail linked to a transaction is encrypted by the Zk-Snark security protocol including the amount, the recipient, and sender. It is important to note that Zcash’s privacy element does not eliminate the information linked to a transaction, but encrypts it, preventing it from being tracked.
Decred
Decred or DCR is another privacy token. Privacy coins are known to offer two different types of elements. Firstly, the identity of the sender is hidden or obfuscated, and the second one is the amount that is being transferred. At the moment, Decred only offers the former, though it is working on churning out the latter in the feature.
Transactions are jumbled up by the Decred’s servers, hiding the consumer’s data. This is attainable because of the ChoinShuffle++ element that was incorporated into Decred, offering the optional privacy element to transactions.
Keep Network
KEEP is the native token of Keep Network, which is building a privacy-inclined infrastructure that will be incorporated in public blockchains. Private data can be utilized on public chains without exposing it to the public as a result of the infrastructure on Keep Network.
Keeps are off-chain features permitting smart contracts to utilize private information without allowing it to be accessed by the public. As a privacy focused network, its native token is also a privacy coin, allowing people to make transactions without their data being available to the public. Nodes that monitor the keeps are given a slice of the secret with the random beacon element.
Horizen
ZEN is the native token of Horizen and it is a private token. Horizen is designed to host privacy-preserving decentralized applications. To improve scalability, Horizen comes with a blockchain and sidechain. To improve its anonymity feature, the chain uses zero-knowledge proofs that make its utility token untraceable. Transactions can not be tracked by outsiders, unlike regular cryptocurrencies.
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