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Privacy Coins: How Does Anonymous Cryptocurrency Work?

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Privacy Coins: How Does Anonymous Cryptocurrency Work?

What are privacy coins and how does anonymous cryptocurrency work? Unlike traditional cryptocurrencies, a privacy coin allows a user to obscure the link between a transaction and its sender and recipient. As a result, users can prevent the tracking of their wallet activity. The best privacy coins make it impossible for anyone to track a given cryptocurrency wallet’s activity, including the funds it holds and its transaction history.

How can anonymity co-exist within a distributed, peer-to-peer ledger that is by definition public? That’s where the complexity comes in. Developers have innovated several different approaches to tackling the privacy problem without breaking the solution to the double-spend problem. Here is everything you should know about privacy coins, how they differ from traditional crypto, and which are considered to be the best privacy coins.


What Are Privacy Coins?

A privacy coin is a type of cryptocurrency that cryptographically obscuring the link between a transaction and the public wallet addresses of the involved parties. And that makes privacy coins an answer to a problem that exists with all other cryptocurrencies from a privacy perspective.

Bitcoin Is Not Anonymous

How anonymous is Bitcoin? Bitcoin (BTC) is more pseudonymous than anonymous, meaning that it isn’t among our privacy coins. The link between a person’s real identity and their public wallet address isn’t public. But the connection between a wallet and its transactions is not.

If someone manages to connect a wallet address with a real identity, they can connect that person to the entire history of their cryptocurrency transactions with that wallet.

Even without knowing someone’s real-world identity, it’s still possible to track their wallet activity and other wallets it interacts with.

Who Uses Privacy Coins, and Why?

Privacy Coins: How Does Anonymous Cryptocurrency Work?

As such, there are a variety of uses for privacy coins. And for sure, some of them are illegal. In fact, these anonymous cryptos are controversial precisely because they’re perceived as a tool for money laundering and illegal trafficking.

But criminals already have the incentive to hide their crypto activity. So the argument against using privacy coins assumes that making something conducive to criminal activity more available will cause more criminal activity.

Privacy coins also provide safeguards for legitimate users. Some advantages of using privacy coins include:

  • Safeguards against hackers who might try to target large wallets
  • Protecting clients and suppliers lists (for businesses)
  • Protecting financial information

There are many benefits for legitimate users, especially in the face of modern identity theft and data collection.


7 Best Privacy Coins

There are several different types of privacy cryptocurrencies. Functionally, they all do the same thing. What distinguishes them is the underlying technology that masks, obscures or otherwise scrambles the link between wallets and their transactions.

Mainly, these differences come down to the consensus mechanism that validates transactions and adds them to the blockchain, preventing double spending. How do the network’s nodes accomplish the work to add a transaction to the blockchain?

The best privacy coins have the most robust privacy features. They’re also competitive with traditional cryptocurrency in terms of cost and transaction time. The following list is not investment advice.

Monero (XMR)

Monero (XMR), Esperanto for “money,” is the privacy coins’ market leader and even has its own church. Additionally, 85% of illegal mining targets Monero (XMR).

This secure, private and untraceable crypto is actually a fork of the Bytecoin (BCN) protocol, itself the result of a dispute within the Bytecoin dev team and the user community. Monero (XMR) uses a variety of signing technologies to keep cryptocurrency transactions private.

Monero (XMR)’s Most Important Privacy Features

1. Ring Signatures
Where traditional cryptos use unchanging signatures to validate transactions, Monero uses ring signatures. Ring signatures cloak the XMR sender by employing a “ring” of signers who all come together to sign a transaction.

Through this method, the actual sender remains unknown. The recipient’s privacy is also ensured since they are the only party that can detect and spend the funds transferred using the ring signature.

2. Ring Confidential Transactions 
Furthermore, Monero implements mandatory Ring Confidential Transactions, which mask the total amount of a transaction.

3. Stealth Addresses
Finally, Monero utilizes stealth addresses, or a one-time public key, for recipients. This makes it impossible for outside observers to determine if funds are even moving, let alone link wallet addresses.

The combination of all these features makes Monero (XMR) one of the best privacy coins for most users.

Particl (PART)

Particl (PART) leverages many of the technologies behind Monero (XMR), including ring signatures and confidential transactions. An exclusively privacy-focused project, Particl (PART) is also developing anonymous marketplace dApps.

Particl (PART) users can also earn passive income through the crypto’s Proof-of-Stake (POS) consensus mechanism.

Zcash (ZEC)

Privacy Coins: How Does Anonymous Cryptocurrency Work?

If Monero is king in the privacy coin world, Zcash is the most immediate challenger. Zcash (ZEC) is an implementation of the Zerocash protocol, which is based on Zerocoin, a Bitcoin fork back from 2013.

Zcash is the first widespread application of the Zerocash zk-SNARKs, or Zero-Knowledge Succinct Non-Interactive Argument of Knowledge, consensus mechanism.

The zero-knowledge protocol works using a pair of public keys.

  • A paying key linked to funds sent to the address
  • A transmission or viewing key that only the holder of the related private key can access

A payer sends encrypted funds out on the blockchain. And the receiver uses the transmission key to scan the blockchain for funds addressed to them. They use their key to decrypt the funds and access them.

This prevents spent Zcash (ZEC) from being connected to the transaction that created it. The recipient just confirms that it found a payment on the blockchain, but doesn’t have to say which one.

Hush (HUSH)

Hush is a modified implementation of the Zerocash protocol, just like Zcash. It uses the same zero-knowledge proof encryption to preserve the confidentiality of all transaction metadata.

Hush aims to improve the Counteryparty Port support currently lacking in Zcash. This will let Ethereum developers build smart contracts on Hush. Hush (HUSH) is also a great project for miners, offering incentives to early adopters in the form of HUSH tokens.

Private Instant Verified Transaction (PIVX)

Private Instant Verified Transaction (PIVX) is a decentralized and open-source privacy token. It runs on the Blackcoin Proof of Stake 2.0 protocol, which is based on a Bitcoin fork just like Dash (see below).

Like HUSH, PIVX is offering incentives to get in on the ground floor through its 100 percent Proof of Stake consensus mechanism. This means PIVX doesn’t rely on mining. Instead, holders receive block rewards in proportion to their stake, although this does give more control to masternodes.

PIVX ensures privacy through the use of its own sub-currency called zPIV. The “z” stands for Zerocoin, which is the protocol PIVX uses to allow anonymous, private transactions. Its community focus and newness make it a compelling alternative to Dash (DASH).

Dash (DASH)

Dash (DASH) is a widely adopted Decentralized Autonomous Organization (DAO) that was originally forked from Bitcoin.

Offering similar features, Dash also offers some expanded capabilities, including a feature called PrivateSend. PrivateSend is essentially a coin-mixing service that chains together multiple masternodes to keep the origin and recipient addresses of transactions private.

The decentralized protocol creates some challenges, including vulnerabilities to a 51% attack. Dash has responded by collateralizing masternodes with 1000 Dash requirements.

DeepOnion (ONION)

No list of the best privacy coins would be complete without DeepOnion, the Tor-based, ultra-private cryptocurrency that offers an array of security and privacy features. DeepOnion (ONION) is entirely focused on privacy, anonymity and security.

Like other privacy coins, DeepOnion utilizes a native wallet with a Stealth Address feature that protects balances and transaction histories. The DeepOnion wallet software also offers several additional layers of privacy measures, including the latest version of Tor.


Privacy Coins: the Future of Crypto?

Bitcoin is anonymous only up to a point. Its privacy ends where the public blockchain ledger begins.

To solve this problem while still taking advantage of the revolutionary capabilities of digital currency, privacy coins are in many ways leading innovators in cryptocurrency software development.

The tools and technologies that one privacy coin utilizes can rapidly spread to other coins, dApps and cryptocurrency wallets. And today, there are dozens of privacy coin options out there.