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What Are Privacy Coins? Zcash, Monero, Dash Explained
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What Are Privacy Coins? Zcash, Monero, Dash Explained

The idea behind cryptocurrencies is to give users control of their own money. Decentralized and anonymous, digital currencies have destroyed the monopoly of banks. In 2021, two people can complete a financial transaction without the involvement of any regulatory authority. They interact with one another, while their identities remain unknown.

Yet, all transactions are recorded on the blockchain and tracked. If desired, you can track any crypto transaction. However, there are systems where it is much more difficult to track transactions. Some even make it impossible. Contrasting this, if you purchase crypto from an exchange, there will be a record of the transaction and more and more governing bodies are imposing taxes and other regulations onto crypto trades. This can prove quite tricky if you decide to file your own taxes. A system that was created on the foundation of being decentralized, is quickly becoming centralized.

In this article, we will talk about anonymous cryptocurrencies and pseudo-anonymity. Also, we will highlight the top of the most anonymous crypto coins today.

What does cryptocurrency pseudo-anonymity mean?

This may be news to many, but Bitcoin has never been a truly private cryptocurrency. Any BTC address is linked to an IP address and other information. It uses various analytical services such as CipherTrace, Chainalysis, or Crystal.

Transaction histories of the largest cryptocurrency systems are available to the public. Anyone can get information about the addresses and balances of senders and recipients. So everything that happens on the blockchain can be analyzed, and any blockchain user can be de-anonymized. Thus, the lack of privacy is the main problem of most cryptocurrencies. We are talking about their pseudo-anonymity.

The user of the Bitcoin network or any other pseudo-anonymous cryptocurrency can be de-anonymized after re-using the address or passing verification on the exchange. Whereas anonymous cryptocurrencies use cryptographic protocols to complicate data auditing. The address of an anonymous cryptocurrency wallet can be disclosed by its owner only.

Best Anonymous Cryptocurrencies

All this has forced developers to start creating truly anonymous altcoins. Real competition has begun. Developers started issuing new anonymous tokens and applying various protocols to increase the protection of user privacy.

MONERO

Monero bears the title of “the most anonymous cryptocurrency”. The system automatically hides the sender and recipient of XMR coins, as well as the transfer amount. If you need to convert XMR to BTC anonymously, use decentralized exchanges like Godex.

Monero’s integrated approach to ensure privacy consists of the following mechanisms:

  1. The CryptoNote algorithm makes it possible to hide the personal data of the sender and recipient, as well as the amount in the blockchain. Also, they use ring signatures. The transaction is signed by several addresses. It is impossible to determine the address the money arrived from.
  2. Invisible stealth addresses are randomly generated for each operation. It guarantees the anonymity of recipient addresses.
  3. RingCT (Ring Confidential Transactions) anonymizes the number of coins transferred.

In the fall of 2018, Monero used the Bulletproofs mechanism instead of RingCT. It decreased the size of transactions and fees.

Disadvantages of the Monero network:

  • Large transaction size. Monero blockchain is 5 times larger than Bitcoin blockchain per transaction.
  • Scalability issues.

ZCASH (ZEC)

The anonymous cryptocurrency Zcash is based on the Zerocoin protocol. It uses the zk-SNARK zero-knowledge proof protocol to ensure privacy. It also allows signing transactions without disclosing personal information (exit and entry points of the transfer, amount). Due to this, the time of the payment is fixed during transactions only.

The peculiarity of Zcash is that both anonymous and public transactions work on the network on equal terms. Coins in the Zcash network are interchangeable. It makes it impossible to track the previous user of certain ZEC.

Online transfers occur as follows:

  1. The sender sends a certain amount of coins.
  2. Using the overview key, the recipient finds this transfer on the network, decrypts it, and gains access to the funds.

The sender must select the transaction protection option. Then the transfer will happen exactly according to this scheme. Anonymous transactions in Zcash can only be made from encrypted z-addresses invisible on the blockchain. During such transactions, funds are burned and exchanged for new coins.

In October 2018, the developers activated the Sapling update. It reduced the time required to process secure transfers. Moreover, it made it possible to carry out transfers not only from full nodes but also with the help of light clients.

Disadvantages of Zcash:

  • The complexity of the zk-SNARKs technology and the need for a trusted setup.
  • Large blockchain size. Zcash blockchain is 8 times larger than Bitcoin blockchain per transaction.
  • Higher commissions because of more powerful hardware.

DASH (DASH)

DASH is one of the most popular coins on the anonymous crypto market. However, anonymity on the DASH network is not by default. To hide their operations, users utilize the PrivateSend security system, which works like a mixer. It splits coins into small pieces and mixes them several times among several users using random masternodes. After that, it sends them to the final recipient. This multi-stage mixing restricts the tracing of communication between the sender and the receiver.

Anonymity on the Dash network is also achieved through a 2-level blockchain system. Yet, it requires the mandatory use of masternodes. They store information about the sender and the recipient. Thus, we can’t consider Dash a completely confidential cryptocurrency.

Conclusion

Cryptocurrencies provide a certain level of freedom to their users. However, privacy and security remain important issues to consider. Therefore, when choosing the digital currency to deal with, pay attention to the safety of the transactions.

In addition, you can find more helpful resources at Thewebscience.

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