The Complete Beginner’s Guide to Privacy Coins

Beginner’s Guide / 20.05.2020

Privacy coins are gaining traction as they fly the flag of financial privacy. Over the decade, digital currencies have seen their fair share of unjust scrutiny regarding its privacy policies. At one point or another, we’ve all heard of the “evil” that is its anonymity hallmark and how its primary users are criminals hiding behind it. However, no digital currency is disparaged for this particular feature as much as privacy coins are.

Yes, blockchain-based cryptocurrencies offer their users an option of using pseudonyms, giving them a level of anonymity. However, what most fail to understand is that having a pseudonym doesn’t guarantee privacy. 

Most transactions on a blockchain are traceable and can be viewed by the public. Addresses can be linked, and someone can reveal the pseudonym’s real identities, which completely disintegrates their privacy.

This is where privacy coins come in. They were created as a reaction to the realization that other digital currencies aren’t private at all. As more people look into ways to secure their financial privacy, we’ll look at what these coins bring to the table.

What are Privacy Coins?

Privacy coins are unique cryptocurrencies that give the user complete anonymity when making transactions. They use a variety of enhanced and foolproof stealth tactics that keep the user’s identity and transactions wholly concealed. Their built-in privacy features empower users to remain anonymous with different levels of privacy protection. 

Typically, privacy coins conceal records of the sender and receivers’ addresses, undisclosed transaction amounts, and keep wallet information private.

So, what makes a cryptocurrency private?

Features of Privacy Coins

  • Privacy

Real privacy comes with advanced cryptography beyond essential anonymity. A privacy coin makes its user’s privacy a priority by concealing their identities and transaction histories. Transaction details, once hidden, should not be traceable or linkable to the user.

Furthermore, wallet balances should remain private, making it impossible to generate “rich lists” of the wealthiest wallets in the network.

  • Fungibility

When a coin is fungible, every unit of the cryptocurrency is always identical and interchangeable. Bitcoin is not fungible because every coin is linked to its transaction history. Therefore some bitcoins could have a lower perceived value depending on their previous use like something illegal. Therefore, someone can choose not to accept bitcoins with a questionable transactional history, making those coins less valuable than those with clean transactions. 

Privacy coins need to be identical and interchangeable to be a truly private and useful cryptocurrency.

  • Decentralization

Private cryptocurrencies should offer a trustworthy and safe environment for value transfer. Ideally, privacy coins should provide a few layers of decentralization like mining hash power distribution, the geographical location of nodes, and many more.

  • Liquidity

There should be demand for the cryptocurrency. If no one is willing to accept it, then it can’t be used as a privacy coin.

Examples of Privacy Coins

You might want the added privacy of these coins for several reasons, none of which are criminal in any way. Let’s look at a few of the privacy coins available in the market today.

Monero (XMR)

Monero is one of the most private cryptocurrencies available. The coin uses the CryptoNight proof-of-work algorithm to make the network ASIC resistant. Within that, Monero uses several different techniques like ring signatures, and stealth addresses Ring Confidential Transactions to increase privacy. These techniques mix up transactions in the network to ensure no one observing the Monero blockchain can trace transactions.

The only thing displayed on the blockchain is the validity of transactions. Therefore, only the sender and receiver involved can tell the amount of coins transferred. The high level of privacy and security is making Monero quite accessible for all sorts of online activity.

However, Monero is challenging to purchase with fiat currency. It is purchased using other cryptocurrencies, and some merchants accept it as a form of payment.

ZCash (ZEC)

ZCash is a widely used coin that offers optional privacy. It implements a cryptography tool called “Zero-Knowledge Proofs” that gives users the option to protect their transaction privacy. ZCash uses an open blockchain ledger that doesn’t record, sends, or receives addresses. Only the sender and receiver have the encryption key to the transaction.

Verge (XVG)

It was initially known as DogecoinDark. Verge differs from most private coins that rely on cryptographic techniques to secure privacy. Instead, it uses an anonymous network layer, Tor and I2P, to ensure user privacy. The tools fully obfuscate the user’s IP addresses and location.  

Tor and I2P work together to hide a user’s location and offer stealth addresses making sure there is no link between transaction records to any identifying information.

Dash (DASH)

Dash originated as a fork of Bitcoin in 2014 as a blend word for Digital Cash. It has a reputation for being the most anonymous altcoin available and is also known for its fast transaction speed. Dash uses a strategy called PrivateSend that anonymizes transactions carried out by its users. This tool mixes transactions of several users and projects them as one single transaction. 

Therefore, by the end of the process, the origin of the transaction is hidden. However, PrivateSend is not automatic and needs to be selected as an option at a fee. There is also no complete guarantee a user can stay anonymous if the receiver has not initiated their PrivateSend choice.

Author’s Notes

The increase in government regulatory scrutiny in the cryptocurrency market is making privacy coins an ally against privacy infringement. The enhanced privacy features that these coins offer to ensure that the users’ identity and activities are protected. Let’s not forget that privacy coins are fungible, and their history of use can’t corrupt their value. The choice in currency remains up to you and what fits you best.

When picking a privacy coin to invest, one needs a lot of initial research. It is worth mentioning that the systems behind each currency keep on developing and changing. It’s therefore important to be up to date with your information. 

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Born in Bucharest, Marius is the founder of Crypto Adventure. Since his first contact with Bitcoin and cryptocurrencies, he never stopped believing that they are one of the most important innovations of our time, which will forever change the way business is done.