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Beginner’s guide to Privacy Coins

Every bitcoin can be traced back and identified if there’s illegal activity. Therefore, some people use a Bitcoin mixer, for example, bestmixer.io to make transactions untraceable and fungible. It can distort  the trail from the original source but it is not completely untraceable. Therefore, several cryptocurrencies that specialise on concealing transaction data have been introduced. The three major privacy coins (Monero, Dash & Zcash) will be discussed in this article.

 


Monero

Monero (XMR) is the first altcoin to provide untraceable transactions. Monero’s privacy  is provided by CryptoNote protocol that implements a ring signature system. During each transaction, numerous  addresses will be included for mixing. An observer cannot tell which address is the real sender. It provides privacy  for everyone included in the ring signature.

Also, the transaction amount is confidential. A Math Function is applied so that only the sender and the receiver can know the actual amount. The technology behind is called Ring CT.

For each transaction, a one-time random address is generated. Therefore, transactions are unlinkable to your public address.

The diagram illustrates how XMR transactions are obscured with more routes the transaction  goes through. After implementing ring signatures, all users referenced will have an equal possibility of being the actual sender.

 


Dash

Dash (DASH) was launched in Jan 2014 as Xcoin and rebranded as Darkcoin. In Mar 2015, it rebranded again with the name Dash to avoid correlation to the dark market. The Masternode performs its private transaction through Privatesend. Privatesend can break down your transaction into specific denominations (0.01,0.1,1 and 10 DASH) and mix it with transactions from different people. After a few mixes, the coins will be indistinguishable from other coins on the network.

However, the Privatesend function is optional. Other transactions are as transparent as those on Bitcoin’s blockchain. The anonymous transactions may still be traceable if they are connected to the transparent ones.

 


Zcash

Zcash (ZEC) is based on Bitcoin’s code. They use a zero-knowledge proof method called zk-SNARK (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge). It is a method that one party can prove to another party that a given statement is true, without conveying any information apart from the fact that the statement is true. Transaction metadata can be encrypted during verification, including the amount, sender address and receiver address.

Similar to Dash, users can choose to send publicly or privately (shielded address/transparent address). However, most users and exchanges only use or support transparent addresses. Those who use the shielded function will be quite suspicious to investigators. Therefore, using Zcash is not 100% anonymous.

 


Conclusion

For people who care about privacy, these coins are better than bitcoin. However, some suggest that there can be a vulnerability in their privacy technology. According to a research paper [1], there was a risk that Monero’s transaction can be traceable because a pattern can be seen in the mixing process. Though this problem was solved, there may still be an undiscovered vulnerability. Also, the adoption of Monero is slow because of the complexity of its blockchain. With low usage(~3000 tx per day) and intense regulation on exchanges, the government may be able to track transactions on exchanges.

Last year, the Japanese government discouraged exchanges from listing cryptocurrencies that can provide a sufficient degree of anonymity[2]. With increasing regulations, privacy coins may need to compromise privacy or go underground.

In contrast to the common misconception, crypto is not a better tool than cash for illegal activities or money laundering. Instead of just using blockchain analysis to monitor suspicious transactions, investigators have various tools and a lot of resources to track illegal activities. In a recent senate hearing, US Customs official explained that money laundering using crypto can be traced[3]. Criminals use crypto like btc/monero to trade drugs and transfer value. However, they still need to convert crypto into fiat. To exchange for fiat, they have to go through crypto exchanges or p2p platforms. The investigators utilize traditional methods such as surveillance, undercover and informants, combined with blockchain analysis to find out the illegal activities.

Riccardo Spagni, a core member of Monero has said that “Privacy isn’t a thing you achieve, it’s a constant cat-and-mouse battle.” It seems that uncrackable anonymity is not yet achievable for existing cryptocurrencies.

 

[1] An Empirical Analysis of Traceability in the Monero Blockchain, https://arxiv.org/pdf/1704.04299/

[2] Japan’s Ban Is a Wake-Up Call to Defend Privacy Coins
https://www.coindesk.com/japan-wake-call-get-ready-defend-privacy-coins/

[3] US Customs Official Claims Crypto Conversions Can Be Traced
https://www.coindesk.com/us-customs-official-says-crypto-conversions-leave-criminals-exposed/

 

Written by Charlie Tsang, Trader at Genesis Block
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