- By Pierre-Alexandre
July 2nd, 2019
As the cryptocurrency market continues to advance further with new developments, investors are getting mature in their choices. Unlike the crypto mania in 2017 where investors rushed to buy every new crypto token coming to the market, they (investors) are now making informed decisions while buying new cryptocurrencies.
While the crypto market gets more open, investors’ demand for privacy-driven cryptocurrencies is on the rise. In this topic we will be talking in detail about the growing demand for privacy coins and their importance in the market. Besides, we will also be discussing some regulatory stipulations.
This article aims to educate the reader in detail about the concept and use of privacy coins. We will talk about the available options and compare the two most popular privacy coins - ZCash and Monero in detail.
1. What are privacy coins?
As the name suggests, “Privacy Coins” are basically blockchain-based cryptocurrencies that offer its users crucial features like privacy and anonymity during each crypto transaction.
In its early years, popular cryptocurrencies like Bitcoin and Ethereum were perceived to be anonymous. However, as the crypto space evolved, these networks got more transparent and privacy of the crypto users continued to deteriorate.
For example, Bitcoin’s public blockchain network shows the information like the sender and the receiver address in each transaction. Moreover, it also shows the amount of BTC sent.
Although the wallet address has no names attached to it, there are still ways to trace them when the user liquidates his/her funds at the exchange. Thus Bitcoin is more of a pseudonymous cryptocurrency instead of anonymous.
Privacy coins differ from these traditional cryptocurrencies in a way that they completely obscure the user-information during each transaction. Besides, they also conceal information about wallet activity and maintain private account balances for their users.
Different privacy coins use different mechanisms to keep the user information private.
- ZCash (ZEC) offers the enhanced privacy feature to its users using the zk-SNARKS, a zero-knowledge security layer.
- Monero (XMR) uses Stealth Addresses, Ring Signatures, and Ring Confidential Transactions.
- Dash (DASH) uses CoinJoin.
So now that you have understood the concept of Privacy Coins, let us understand why we need privacy coins.
2. Why Do You Need Privacy Coins?
As discussed, the principle issue with using public blockchain networks is that they provide pseudonymity instead of anonymity. Pseudonymous networks provide a gateway to access user information thereby leading to invasion of privacy.
Now, if cryptocurrencies are to actually replace fiat going ahead, they can be used to make payments in daily life. In this case, you don’t want the world to know about your daily transactions or in case you are sending crypto-money to your friends and family. There are instances where users want their transactions to remain private and the “privacy coins” exactly addresses this issue.
On the other hand, highly transparent blockchain networks pose a threat to the “fungibility" of the digital currencies. Fungibility is something wherein an asset or a good can be interchanged with other individual units of the same nature.
Thus, fungibility ensures that the value of 1 BTC remains as 1 BTC, no matter what.
However, the highly transparent nature of blockchain can be a threat to the fungibility of its crypto tokens as once can track all the previous transaction tied to a particular coin. Now, there are enough cases wherein a token receiver refuses to accept the coin due to his “bad” history.
In such a case, the coin holds the threat to being worthless as it has no acceptance in the ecosystem. Such non-fungible coins will put an additional burden on the last consumer or the exchange holding it. Now suppose that you have received a BTC with “bad” history and without priorly checking it, you’re at risk of losing all your investment if anyone refuses to accept it further.
3. Government Arguments Against Privacy Coins
We recently discussed some of the merits of privacy coins over other cryptocurrencies while highlighting why they can be a better choice for crypto users. However, using privacy coins is like ruffling feathers with regulators and government institutions.
First of all, government institutions across the globe have shown much hostility towards the very decentralized nature of cryptocurrencies, even if they have the public blockchain network. Now having “privacy coins” in the ecosystem is like rubbing salt on the existing wounds.
Regulatory authorities claim that privacy coins serve as the perfect recipe for illicit and criminal activities thereby making impossible to trace the “bad actors”. Robert Novy, the deputy assistant director of the US Secret Service’s office of investigations went to the extent saying that privacy coins are a threat to the “national security”.
Novy even suggested regulating privacy coins adding that
“It is critical that the United States continues to work internationally to improve controls related to digital currency. We should also consider additional legislative or regulatory actions to address potential challenges related to anonymity-enhanced cryptocurrencies, services intended to obscure transactions on blockchains.”
Besides, even the most crypto-friendly nations like Japan and others have expressed discomfort on the use of privacy coins.
Over the last year, regulatory agencies have stepped up measures to get more information on crypto transactions. A number of crypto exchanges hacks and loss of millions-of-dollar of investors’ funds has forced the agencies to have a strict vigilance on the crypto ecosystem.
But will acting against privacy coins help the government agencies? Note that the demand for privacy coins is already growing. Now if the government agencies push crypto exchanges to delist these tokens, it is likely to encourage the community to develop trading solutions outside the ambit of exchanges. In this case, decentralized exchanges (DEXs) will get huge attention. Moreover, reducing supply will only boost the price of privacy token even higher.
So what’s the solution to this when both sides have their strong points? It will only be creating a win-win protocol for both - governments and privacy coin owners - while not venturing too much into other’s space. Thus, having a protocol that strikes a good balance between extreme transparency and full anonymity will go well with the regulators.
4. Which Are the Most Popular Privacy Coins?
As noted that with the growing regulatory intervention, the popularity for privacy coins is on the rise. It shows the growing willingness among investors to participate in the crypto space despite the regulatory hurdles.
Over the last few years, a number of new privacy tokens have entered the crypto market. However, the three most popular privacy coins are Monero (XMR), Dash (DASH), and ZCash (ZEC). All these three work towards a common goal of providing privacy to their users. However, their ways of implementing it are different.
- Monero (XMR): Monero implements the CryptoNight Proof-of-Work protocol which uses the ring signatures to hide the entire ledger of transactions. However, the platform hosts a secret key to let users identify their one-time address on the Monero blockchain, linked to their account.
Monero is currently the most valued privacy coin with a market cap of $1.4 billion (early July 2019).
- ZCash (ZEC): ZCash allows its users the flexibility to choose between transparency and privacy. It works using the zk-SNARKS protocol also called as zero-knowledge proofs. Although all transactions get recorded on ZCash's public blockchain, data involving a private address is encrypted that hides it from being visible.
- Dash (DASH): Dash offers privacy to user transaction through mixing coins with other which makes it difficult to identify the origin of a given transaction just by looking at its public blockchain. The coin-mixing service performed by the Dash master nodes is called PrivateSend.
After Monero, Dash is the second-largest privacy token with a market cap of $1.3 billion (early July 2019).
Some of the other emerging and upcoming “privacy coin” tokens are PIVX, ZCoin, Komodo, ZenCash, NAV Coin, Verge, etc.
5. Everything You Need to Know About ZCash
ZCash’s entry in the crypto space happened on October 28, 2016, when the privacy coin was forked out of Bitcoin. Previously called as ZeroCoin, ZCash is an open-source peer-to-peer cryptocurrency similar to Bitcoin.
Its major focus is on anonymous, private, and fungible transactions which Bitcoin and other cryptocurrencies fail to offer. ZCash uses a special cryptographic protocol called zk-SNARKS also called zero-knowledge proof. This protocol helps ZCash users to shield the sender and receiver information, as well as the amount transacted.
However, the privacy feature is not built-in within the ZCash design. Users can choose between transparent transactions or opt for privacy feature when desired. Thus, the ZCash network has two addresses: “t” addresses or transparent addresses, or, “z” addresses which are private or “shielded” addresses.
The zk_SNARKS protocol was developed by cryptography scientists and researchers from Massachusetts Institute of Technology (MIT), Johns Hopkins University, Tel Aviv University, and Israel Institute of Technology.
However, despite being an open-source project, one thing unusual about ZCash is that there’s an official company behind it called as the Zerocoin Electric Coin Company (ZEEC) headed by Zooko Wilcox-O’Hearn.
6. How Does ZCash Work?
As we have understood, ZCash uses the robust zk-SNARK protocol to encrypt and shield the user data or the transaction data. However, ZCash supports both private as well as public transactions, and hence the two ZCash address types are interoperable. Thus the platform supports four major transaction types as shown in the below image.
- A Z-to-Z transaction is a completely private transaction but appears on the public blockchain network. However, it just provides an intimation that the transaction has occurred and the fee has been made without revealing any further details.
However, to execute a completely private transaction, it is necessary that both the sender and receiver are using z-wallet addresses.
ZCash also allows users to disclose z-address and their transaction details with trusted third parties like for compliance and auditory needs.
- The transactions between two transparent addresses (t-addresses) just work similarly to the Bitcoin wherein anyone can see the user and the sender address as well as the amount in the transaction.
- While performing transactions between the two interoperable “Z” and “t” addresses, the zk-SNARKS protocol performs the shielding and un-shielding of data as required.
7. ZCash Special Features And Details
Forked out of the Bitcoin network, ZCash has similar functions and behaviour like the world’s largest cryptocurrency. The ZCash blockchain follows the Proof-of-Work consensus mechanism. It means that new blocks to the ZCash network shall be added by solving the mining algorithm which gets more and more complex on addition of new blocks.
There are a total of 21 million ZCash (ZEC) tokens which can be mined through POW Equihash Algorithm. ZCash was not ICO-funded or pre-mined like other crypto projects. Instead, it has a unique distribution pattern wherein early-stage investors pledged $1 million to the projects.
The investors were promised 10% “founder’s reward” wherein new ZCash tokens mined for four years shall be distributed in an incremental manner.
8. ZCash Recent Updates, Market Sentiment, Futures Prospects
The ZCash community and developers are constantly working to address user anomalies by introducing new updates which makes the network more robust and secure.
On June 17, the ZCash Foundation released an open source software client in partnership with blockchain company Parity Technologies. The software client offers redundancy for the first client ‘ZCashd’ failing. It will lead to providing better security for its crypto network in general.
In a report by Forklog on June 22, ZCash’s parent company - The Electric Coin Company (ECC) - is planning to implement the “sharding” scalability solution. ECC chief engineer Nathan Wilcox said that the firm aims to make “ Zcash usable by 10 billion people by 2050”. Thus, it wants the ZCash network to be capable enough to manage thousands or millions of transactions per second.
For further updates, you can follow ZCash schedule and roadmap on its official website.
Overall, with the growing regulatory intervention, the demand for privacy coins and especially “ZCash”, is growing. Looking at the new developments introduced, the market sentiment for ZCash is overall positive.
Since the beginning of 2019, ZCash has surged nearly 100% and is currently trading at $114 with a market cap of $781 million. The popular and controversial figure Edward Snowden has spoken openly on the need for privacy coins. Praising the ZCash technology, Snowden said:
“There’s nothing else in the digital currency space like the cryptographic technique underlying ZCash. It’s a moonshot: risky, but certain to change everything if it succeeds.”
9. Everything You Need to Know About Monero (XMR)
Just like Bitcoin is the world’s first cryptocurrency, Monero (XMR) is the world’s first privacy coin launched in April 2014.
Monero (XMR) is an outcome of the fork (split) of the Bytecoin cryptocurrency. Riccardo Spagni started the Monero project in partnership with six other developers. Just like ZCash, Monero is not ICO-funded or pre-mined and is completely driven by market forces.
The Monero blockchain network has the Proof-of-Work consensus model. The cryptocurrency uses the CryptoNote protocol earlier used by Bytecoin. CryptoNote is basically an application layer protocol that powers many decentralized privacy-oriented cryptocurrencies.
The total number of XMR tokens in circulation is kept at 18.4 million. The mining for Monero (XMR) tokens will supposedly happen up to May 31, 2022. After this deadline, 0.3 XMR per minute will be continuously fed in the system, forever.
This will ensure that the coins never run out of the system and will further continue to incentivize the miners.
10. How Does Monero Work?
Known for implementing privacy and anonymity, Monero has a unique working framework which brings these features into play. The framework comprises of three different features which bring confidentiality to the Monero transactions.
- Ring Signatures: Ring Signatures hide the identity of the sender by allowing multiple parties to sign the transactions. Thus, ring signatures make it appear like multiple parties are eligible to send the transaction, however, only one is the actual sender. This makes it hard to determine who is the actual or the original sender. This way Monero maintains the privacy of the sender.
- Stealth Addresses: Just as the ring signatures protect the sender’s privacy, stealth addresses protect the recipients’ privacy. The stealth addresses prevent any third party to see the transactions happening in and out of that address.
While using the stealth addresses, the sender creates a one-time address based on the recipient’s address. As a result, only the sender and receiver will know where the Monero is sent. The receiver can scan the entire blockchain for the one-time stealth addresses to verify the received funds.
- Ring Confidential Transactions (Ring CT): The Ring CT features helps to hide the transaction value of funds exchanged. However, at the same time, it also allows the transacting parties to acknowledge the fund transfer. This helps the Monero blockchain to confirm the validity of the transactions. To know more about the workings of Ring CT, read here.
- Kovari: This is an open source technology that helps to obfuscate the IP address while transacting Monero. Kovari uses many encryption techniques to hide the IPs along with the geographical location of the transactions. It does this by creating another layer over the internet. You can learn more about Kovari in its official video.
11. How to Buy and Store Monero?
Due to the private nature, not many crypto exchange support trading Monero (XMR). However, some of the crypto exchange supporting the buying/selling as well as storing the XMR tokens are: Binance, Kraken, Livecoin, Bifinex, HitBTC, Bitsquare, Gate.io, and a few more.
To store the Monero (XMR) tokens, there are several web wallets, desktop wallets as well as mobile wallets. The most popular web wallet to store XMR is the “MyMonero” wallet whereas the desktop wallet is Monero GUI Wallet available on Mac, Windows, and Linux.
Some of the popular mobile wallets for storing Monero are Edge (Android, iOS), Monerujo (Android), Cake Wallet (iOS).
Note that storing your XMR tokens online is not advisable as you are at a high risk of losing them to online hackers. In such a case, cold storage wallets or hardware wallets are the best option. Some of the hardware wallets supporting Monero (XMR) storage are Ledger Nano S, Ledger Nano X, Trezor One, and Trezor T.
3 Interesting Facts About Monero You Didn’t Know
- The supply for Monero’s XMR token is virtually infinite and has a built-in adjustment for inflation.
- 2017’s most popular global ransomware attack WannaCry converted all its received payments to Monero.
- As Monero can be mined on low-power CPUs, online hackers are attacking popular website visitors by injecting their computers with malware that can draw the computing power to mine the Monero tokens online.
12. ZCash VS Monero
Here is a quick brief to the differences between these two privacy coins.
- ZCash uses the Proof-of-Work “Equihash Algorithm” for mining z-blocks where the Monero implements the Proof-of-Work CryptoNode protocol.
- ZCash employs zk-SNARKS or zero-knowledge proof for privacy feature. Monero implements, Ring Signatures, Stealth Addresses, and Ring CT.
- ZCash’s total supply is fixed at 21 million while Monero’s supply is virtually infinite.
- Monero offers by default private transactions while ZCash allows users to choose between public and private transactions.
Check out the table below to have a quick glance on the differences between ZCash and Monero:
October 28, 2016
18 April, 2014
Founder and team
Electric Coin Company, Founder (Zooko Wilcox-O’Hearn)
Nicolas van Saberhagen
And 5 other unidentified
18.4 million XMR + 0.3 XMR/minute
CryptoNight Hash Algorithm
The Average speed of transaction
2.5 minutes block time
Dynamic block time
The average fee of transaction
Ring signatures, Stealth Addresses, Ring CT
By now, we hope that we would have answered all the possible questions arising to you about privacy coins. You’re free to reach out to us in case of any queries. Here’s a quick summary of all the things we have discussed in this article:
- What is Privacy Coins, Different Types of Privacy Coins, Their Importance, and the Regulatory Concerns.
- The Most Popular Privacy Coins In the Market
- Everything you need to know about ZCash
- Everything you need to know about Monero
- Comparison Between ZCash and Monero