This is the Beginner’s guide to privacy coins. We can trace back and identify every Bitcoin related to 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 (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, there will be an inclusion of numerous addresses 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. We call the technology Ring CT.
The generation of a one-time random address will be present for each transaction. 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.
The launch of Dash (DASH) was in Jan 2014 as Xcoin and had a rebranding 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 connect to the transparent ones.
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. Encryption for transaction metadata 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.
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 , there was a risk that Monero’s transaction can be traceable because a pattern can be seen in the mixing process. Though this problem has a solution, there may still be unforeseen vulnerabilities. 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. 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. 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.
 An Empirical Analysis of Traceability in the Monero Blockchain, https://arxiv.org/pdf/1704.04299/
 Japan’s Ban Is a Wake-Up Call to Defend Privacy Coins
 US Customs Official Claims Crypto Conversions Can Be Traced
Written by Charlie Tsang, Trader at Genesis Block
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Feel free to ask any questions or just discuss crypto.
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