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Examples of privacy coins: Monero, ZCash, DASH

In Blockchain

A privacy coin is a cryptocurrency that is designed for transaction privacy.

Privacy coins can be used to secretly send money wherever, whenever.

Let’s take a look at three cryptocurrencies that are marketed as private alternatives to Bitcoin.

Monero (XMR) 

Monero has a combination of features that make it the most private cryptocurrency in existence at this time.

Here’s what makes Monero so private: stealth addresses, ring signatures, Kovri I2P implementation, and a top-notch development team.

Let’s have a look at how each one works.

Stealth addresses

Transactions on the Monero network are done with unique one-time use stealth addresses designed to obfuscate a transaction’s destination.

Let’s say Alice sends 15 XMR to Bob’s public wallet address. When she generates the transaction in her wallet, the Monero protocol automatically generates a one-time stealth address (anonymous middleman address) to send the 15 XMR to.

At this point, the 15 XMR in the stealth wallet address can be accessed by Bob via his wallet’s private spend key.

Notice that Alice and Bob’s wallet addresses are never directly linked in this transaction. This is how stealth addresses provide unlinkability between the sender and receiver.

Ring signatures

To obfuscate a transaction’s origin, the Monero network uses ring signatures to perform transaction mixing. When a Monero transaction is generated, the protocol automatically mixes the sender’s transaction with other spendable transaction inputs on the network.

The number of mixed inputs, also called “mixin level”, can be specified when generating a transaction, and a higher mixin level results in a more secure transaction with a higher fee.

To someone viewing the Monero blockchain, any one of these inputs can be the actual sender’s input. Monero takes ring signatures one step further through RingCT (Ring Confidential Transactions).

RingCT hides the amount of XMR in each transaction by applying a range proof mathematical function to the transaction.

In this system, the network and public observers of the blockchain can verify the validity of XMR transferred, but only the sender and receiver are able to see the actual amount of XMR transferred. This is how the RingCT implementation of ring signatures makes transactions on the Monero untraceable.

Kovri I2P implementation

Kovri is Monero’s implementation of I2P (Invisible Internet Project), an open source network layer that allows for censorship-resistant Internet usage by routing traffic through volunteer nodes around the world.

Kovri is specifically designed to encrypt your Monero traffic and route it through I2P nodes. By using Kovri, your IP address cannot be linked to your Monero transactions, therefore providing an even greater degree of privacy.

Lastly, Monero’s most powerful feature is the lack of opt-in privacy. This means all transactions on the Monero network are private by default.

Fungibility

Stealth addresses and RingCT provide plausible deniability to both the sender and the receiver. Furthermore, wallet transaction details and amounts are not transparent on the public blockchain, which means XMR cannot be tainted or discriminated against based on their previous transaction history. These unique privacy properties make Monero a truly fungible cryptocurrency.

Decentralization

Monero was designed to be a decentralized blockchain project from the ground up. Firstly, Monero did not have an ICO (initial coin offering) or pre-mine, which means the developers did not mine a ton of coins for themselves before opening up the project to the public. As a result, Monero has a more decentralized coin distribution than most other cryptocurrencies.

Secondly, Monero has scheduled hard forks twice a year, which allow developers of the project to change the blockchain’s PoW consensus algorithm to counter ASIC miners.

ASIC miners are hardware chips that are optimized to hash a specific consensus algorithm, and Monero makes it risky to centralize mining power in large ASIC farms because they could be rendered obsolete following a fork to a new consensus algorithm.

By deterring the dangers of mining farm centralization, Monero incentivizes individual miners to set up nodes around the world resulting in a decentralized geographical distribution of the project.

Liquidity

Monero is currently the #13 cryptocurrency with a $1.13 billion market cap with BTC, ETH, USDT, and fiat trading pairs.

Zcash (ZEC) 

Zcash is a fork of the Bitcoin protocol with the addition of a privacy layer via a cryptographic proof called zk-SNARKs.

Privacy

Zcash achieves privacy via an implementation of zk-SNARKs, which stands for “Zero Knowledge Succinct Non-Interactive Argument of Knowledge.”

With zk-SNARKs, Zcash can verify transactions on the blockchain without their revealing origins, destinations, and amounts transferred.

The technical details are quite complicated, but think of zk-SNARKS as a mathematical proof that allows a “prover” to prove the authenticity of a statement to a “verifier” without revealing any specific information about the statement other than the authenticity of the statement.

Fungibility

Unlike Monero, Zcash has two types of addresses - transparent and private.

Transparent wallet addresses start with t, while private wallet addresses start with z.

Since fungibility requires no knowledge of previous financial history, only transactions between two z addresses can be considered fungible.

Note that moving ZEC from a t address to a z address can be used as a “shielding” method to essentially erase the financial history of the ZEC in question - this means ZEC can become fungible after it has been moved to a private wallet. Thus, Zcash can be described as a semi-fungible cryptocurrency.

Decentralization

Like Monero, Zcash also did not have an ICO or pre-mine. Instead, the founders of Zcash formed a for-profit corporation called Zerocoin Electric Coin Company, and received $1 million of startup funding from a group of private investors.

In order for the corporation’s investors to recoup their investment, Zcash has a built-in founders’ reward which distributes 20% of the mining rewards to its founders over four years.

Since Zcash is developed by a for-profit corporation, it has received significant criticism regarding this centralized corporate structure.

Zcash is a fork of Bitcoin, but uses a different PoW consensus algorithm called Equihash. Earlier this year, an Equihash-compatible ASIC miner was announced by Bitmain, which opens up Zcash’s future to miner centralization similar to Bitcoin. Zcash responded with the intention to investigate the potential effects of ASIC mining on the network.

Liquidity

Zcash is currently the #22 cryptocurrency with an $448 million market cap with BTC, ETH, USDT, and fiat trading pairs.

DASH (DASH) 

 

DASH is a cryptocurrency that uses a system of masternodes and CoinJoin to provide privacy features for its users.

Privacy

Like Zcash, DASH offers both transparent and private transactions.

Private transaction capability, also called PrivateSend, is made possible via an implementation of CoinJoin.

Originally created by Bitcoin core developer Gregory Maxwell, CoinJoin is a trustless tool that combines or mixes multiple Bitcoin transactions into a single transaction with the goal of obscuring the exact transaction flow of each individual transaction.

CoinJoin has been implemented into several services and wallets, but the most well-known one is JoinMarket, a decentralized and marketplace that offers users the ability to transact as part of a CoinJoin transaction.

DASH claims to be decentralized, but its implementation of CoinJoin is arguably not very decentralized at all.

PrivateSend transactions on the DASH network are processed by masternodes. A masternode is a server that stakes or freezes a certain number of coins, performs accounting and other housekeeping tasks, and receives a reward for its services. In DASH’s case, masternodes must stake 1,000 DASH each and receive 45% of the block reward. In this model, the input/output details of PrivateSend transactions are logged by masternodes.

If a single entity has the ability to control or spy on a portion of DASH’s masternodes, it’s entirely possible to reverse engineer PrivateSend transactions to reveal origin and destination details.

Like Zcash, DASH has struggled with the adoption of its privacy features. In DASH’s case, the issue mainly revolves around liquidity.

Since PrivateSend is a CoinJoin implementation, it requires liquidity and demand in order to mix effectively and privately. After many user complaints about the slowness of PrivateSend transactions, the DASH community voted to pay five liquidity providers to generate liquidity for mixing services.

While this has increased the speed of PrivateSend transactions, it has also caused understandable speculation about possible collusion between the five providers. At this point, we can conclude that privacy on the DASH network is in the hands of a few masternodes and mixing liquidity providers.

Fungibility

Like Zcash, DASH has optional privacy. Thus, DASH is only fungible when using the PrivateSend feature. If PrivateSend is not enabled, transactions are completely transparent on the blockchain and the associated DASH coins are not fungible.

Decentralization

DASH is a decentralized cryptocurrency, but the decentralization of its privacy features isn’t up to par with Monero and Zcash, which both have privacy baked in at the protocol level. DASH’s masternode and mixing liquidity provider model puts privacy features on a second tier that is more prone to centralization.

Liquidity

DASH is currently the #14 cryptocurrency with a $2 billion market cap with BTC, ETH, USDT, and fiat trading pairs.

 

Conclusion

At this point in time, Monero is generally viewed as the most private cryptocurrency on the market today.

If Zcash follows through with performance improvements and finds a way to implement a zk-STARKS trustless setup, it has a chance to become a worthy alternative to Monero.

DASH’s privacy features rely on a second tier masternode model that’s more vulnerable to centralization and spying when compared to Monero and Zcash’s privacy implementations. 

This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.

WRITTEN BY

Liquid

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