Advantages & Disadvantages of Privacy Coins

April 20, 2022

Crypto World

Ana Rojas

What Are Privacy Coins?

Bitcoin has never been a truly private cryptocurrency. BTC addresses can be linked to IP addresses and other user information using CipherTrace, Chainalysis, and Crystal analytical services. Read more about truly privacy coins in the new StealthEX article.

The transaction history of the largest cryptocurrencies is freely available, so any user can get the addresses and balances of senders and recipients. The analysis of transactions in the blockchain can provide information that will allow deanonymization of the user. Disclosure of personal data can be avoided, but it will require a lot of effort from the user.

Due to the openness of the blockchain ledger, the anonymity of cryptocurrency networks has been in great doubt among most consumers. The pseudonymity of cryptocurrencies has forced community members to develop truly anonymous altcoins. Therefore, most developers have thrown their efforts into creating zero-knowledge currencies that can allow maximum privacy by protecting users from tracking all transactions made.

Privacy cryptocurrency is a peer-to-peer payment system that has its own unit of calculation. The use of cryptographic protocols makes it difficult or impossible to trace transactions on the blockchain.

Privacy crypto is maintained through several cryptographic features. The main one is “Proof-of-Work”,  an algorithm to protect against all ways to track the number of transactions in the blockchain. The disadvantage of PoW is the need to use a large number of resources to achieve transaction anonymity.

Ring signatures are also used for zero-knowledge transactions. They mix all the transfers on the network, and users cannot track the transaction. Another method by which you can achieve a zero-knowledge transaction is the use of stealth addresses. Funds are deposited to such an address by the sender, and only the recipient has access to it. Other users do not have access to it, which prevents transactions from being tracked. The most private cryptocurrencies, such as Zcash, achieve their anonymity thanks to the work of developers who every day find new methods for conducting zero-knowledge transactions. At the same time, we should not forget that sometimes you can track any, even the most secure transaction.

The Most Popular Privacy Coins

The first anonymous cryptocurrency Bytecoin was released in 2012. Since then, several such cryptocurrencies have appeared. Monero, Dash, Zcash, Beam, and Grin gained popularity.

1. To ensure privacy, Monero uses ring signatures and stealth addresses that hide coins, transaction amounts, and recipient addresses. The peculiarities of Monero are the large transaction size and scalability issues. The Monero blockchain is five times the size of the Bitcoin blockchain per transaction.
2. Zcash uses the zk-SNARKs zero-knowledge proof protocol. Anonymous transactions in Zcash can only be carried out from encrypted z-addresses that are not visible on the blockchain. When conducting such transactions, the funds are burned and exchanged for new coins.
3. The anonymous Dash cryptocurrency uses the PrivateSend mechanism, which mixes the coins of several users and combines them into one transaction. Mixing happens on masternodes. After mixing, it is almost impossible to track the sender and recipient, but the information about them remains with the masternodes. For this reason, Dash cannot be considered a completely private cryptocurrency. 

MimbleWimble Protocol

In January 2019, two cryptocurrencies were released based on the MimbleWimble protocol. The Beam mainnet launched on January 3rd, followed by Grin on January 15th.

The MimbleWimble protocol uses the elliptic curve method for signing transactions, as well as the Confidential Transactions and CoinJoin mechanisms. Confidential Transactions hides transfer addresses and amounts from outsiders, while CoinJoin combines several transactions into one, mixing transactional inputs and outputs.

In MimbleWimble, there are no usual addresses – instead, wallets exchange data with each other. At the same time, MimbleWimble-based blockchains do not store transaction history. They record information about the owners and the state of the coins. Beam developers estimate that such blockchains will be at least three times smaller than the Bitcoin blockchain.

Merits and Drawbacks of Privacy Coins

Advantages

Law firm Perkins Coie believes that Monero, Zcash, Dash, and Grin, which are focused on increased anonymity, are less used for money laundering than other cryptocurrencies and do not require additional supervision. They argue that the benefits of privacy coins significantly outweigh their risks, and the current global regulation of cryptocurrencies is able to effectively combat the legalization of criminal funds and does not need to be tightened.

The AML risks of privacy-oriented currencies, while real, do not require specific and tailored regulations that may pose an unnecessary risk of stifling the growth of privacy-oriented cryptocurrencies.

Law firm Perkins Coie

According to the Seattle-based firm, over 90% of the cryptocurrency addresses used on the dark web belong to the Bitcoin blockchain, and only 0.3% belong to Dash, Monero and Zcash combined.

Disadvantages

• You can’t embed a script (programming language) in privacy coins transactions, so it’s impossible to write smart contracts.
• Sometimes complex technologies increase the weight of operations and make them more expensive.
• Anonymous blockchains do upgrades, but the upgrades only apply to new operations. Old entries remain unchanged and can be viewed by attackers.

• We should also consider the disadvantages of coins that affect the users themselves. In addition to increased attention from the authorities, they will have to put up with a rather high commission of trading platforms, due to complex and resource-intensive verification algorithms.

The Future of Privacy Cryptocurrencies

One would assume that private tokens should become a clear hit in the beginning decade, but the reality surrounding us is far from being so rosy. The main obstacle to the wide distribution of such tokens is the negative reaction from financial and state regulators, and it will be extremely difficult, if not impossible, to change it.

The fact is that it is very difficult to track transactions with anonymous coins, which is why they can be used for dubious actions from the point of view of the law. Cases of using anonymous cryptocurrencies for extortion, ransom demands, and payments on the dark web have undermined their reputation in the community. This means that the market prospects for private coins in the light of recent trends are very vague. For example, the Japanese authorities have already demanded the removal of all anonymous tokens from trading, other jurisdictions with developed economies are next in line.

On the other side, Ethereum creator Vitalik Buterin, in a conversation with Block TV, expressed the opinion that private and decentralized coins are much preferable to state-controlled central bank digital currencies (CBDC).

According to him, the main problem with the currencies of central banks or even corporations is the concentration of power and data. Vitalik expressed confidence that the currency of the future will be decentralized, private, and not subject to the threat of centralization coming from a narrow circle of people.

Anonymous cryptocurrencies are needed by anyone who values the privacy and confidentiality of financial transactions. Whether electronic money with a high level of privacy will be able to withstand pressure from controlling structures will be shown in the very near future. 

How to Buy Top Privacy Coins?

Now you know a little more about privacy crypto. If you decide to join the crypto community, you can quickly and easily purchase cryptocurrencies on the StealthEX platform. StealthEX is a service providing non-custodial cryptocurrency exchanges. You do not have to create an account or disclose any personal information to use this platform. Moreover, users do not store the funds on StealthEX – the exchanges are performed wallet-to-wallet.

Just go to StealthEX and follow these easy steps:

1. Choose the pair and the amount for your exchange. For example, BTC to XMR.
2. Press the “Start exchange” button.
3. Provide the recipient address to which the coins will be transferred.
4. Move your cryptocurrency for the exchange.
5. Receive your crypto coins!

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The views and opinions expressed here are solely those of the author. Every investment and trading move involves risk. You should conduct your own research when making a decision.

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