Privacy coins are a class of cryptocurrency with privacy and anonymity at their core. In this guide, we'll look at the most popular coins on the market, how they stay private, where they differ from Bitcoin and what to consider when buying this type of cryptocurrency.
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What are privacy coins?
Designed for maximum confidentiality, privacy coins take the pseudonymous benefits of cryptocurrency a step further. Not only do these coins attempt to hide the identities of their holders, but they also differ from regular cryptocurrencies by deliberately concealing wallet addresses and transaction amounts.
How do privacy coins work?
While all privacy coins use blockchain technology, here are a few examples of the various techniques used by projects to set themselves apart and remain anonymous, ranging from complex Conjoin methods to simple stealth addresses.
Conjoin
Dash (DASH) is the most well-known cryptocurrency to use the Conjoin privacy method. DASH works by mixing tokens from multiple senders into a single transaction before distributing them to new end-user addresses as a part of its Private Send feature.
zk-SNARKs
Through zk-SNARKS or Zero-Knowledge proofs, Zcash (ZEC) users send tokens without revealing who they are, how much they're sending or who they're sending it to. It's this zk-SNARKs feature that allows the transaction to be validated without sharing any identifiable details.
Stealth Addresses
Among other methods, Monero (XMR) uses a system of stealth addresses to make those sending and receiving transactions entirely anonymous. While employing a more complex dual-key protocol, this tech involves creating a new, password-protected anonymous address for every transaction – a stealth address.
How are privacy coins different from Bitcoin?
There's one key difference between Bitcoin and many privacy coins – a freely explorable public ledger.
All you need to know is a user's wallet address and you can use a blockchain explorer to view every transaction they have ever made on the network as well as the balance of their address.
This public ledger is why Bitcoin is not considered a genuine, privacy coin – and also makes it terrible for money laundering.
Privacy coins compared
With over 60+ privacy coins available, here's a summary of some of the 6 biggest privacy coins on the market at the time of writing.
1. Monero (XMR)
Monero is one of the earliest privacy coins, originating in 2014. With a strong, active community and development team, this open-source project remains one of the most popular and well-known privacy coins on the market. It uses several privacy features to stay untraceable and unlinkable, such as ring signatures, stealth addresses and bulletproofs.
Often touted as the first privacy coin, Dash (DASH) was initially launched in 2014 as Xcoin before rebranding as Dash or "Digital Cash" in 2015. The technology behind Dash doesn't just scramble transactions from a privacy perspective; it allows for far quicker transactions vs the likes of Bitcoin. This speed could be key to achieving the ambitions of its development team to become a daily alternative to cash, cards, PayPal and Venmo.
Launched from a Bitcoin fork in 2016, Zcash shares many of Bitcoin's core features, including a fixed total supply of 21 million units. Although with added optional security measures, users can conceal their details with shielded addresses hidden from the publicly explorable blockchain. If a user wishes to remain anonymous, they mark a transaction as "private", which hides the sender, the recipient and the amount they're sending.
Decred (DCR) was designed by former Bitcoin developers who wanted to overcome some of the issues faced over the years, namely, decision-making on controversial topics like hard forks. Decentralized and self-governing, Decred gives holders a vote on the future of their currency. With privacy and security measures added in 2019, Decred aims to be the most secure and sustainable blockchain in existence. The new privacy implementations are based on CoinShuffle++ technology, which conceals the sender's identity after each transaction.
Originally named DogeCoinDark after the popular meme coin (Doge), this cryptocurrency was rebranded as Verge Currency in 2016. While it does have a freely explorable public ledger for anyone to view wallet balances and any incoming or outgoing transactions, Verge uses The Onion Router TOR (famous for its anonymous browser) and Invisible Internet Project (I2P) technology to conceal the IP address and therefore location and identities of its users.
Created in 2019, Beam is a cryptocurrency project with magical foundations. Its protocol is named after a tongue-tying spell from the Harry Potter collection of books, Mimblewimble (MW). MW is the protocol Beam uses to facilitate confidential transactions. By removing the need for addresses, transaction amounts or a public record of transactions, alongside making transactions private by default, the Beam team aims to make privacy, anonymity and scalability a priority over the coming years.
The short answer is yes; they are legal in most countries. As a user, you can hold, send and receive any denomination of private cryptocurrency, but this does depend on where you live. Japan, for example, is one of the few countries to ban privacy coins completely.
On the other hand, some jurisdictions are stamping down on trading these coins on crypto exchanges due to AML (anti-money laundering) rules. Because of this scrutiny, several prominent exchanges such as ShapeShift, Bittrex and CoinSpot have voluntarily chosen to delist privacy coins like Monero and Dash in anticipation of these measures. Alternatively, some exchanges such as Swyftx in Australia claim that local regulators and banks have forced their hand in making the decision to delist privacy coins.
What to consider when buying privacy coins
Just like any cryptocurrency purchase, there are several things to consider before you buy a privacy coin.
Popular cryptocurrencies like Bitcoin and Ethereum are only partly private; while you don't provide personal details like your name or email address, every transaction can be traced to your wallet and, often, your IP address. However, privacy coins aim to conceal this information with various security measures.
With over 60 privacy coins available, and a combined market cap above $2 billion, it's important to look beyond the token price and look at things like the technology, the development team and the core focus as a project.
While some privacy coins may seem similar, they do vary from project to project. Some make scalability a core function, others continue to focus on privacy and others (like DASH) downplay their privacy features in the hope of greater mainstream adoption.
As of today, privacy coins are legal, but that doesn't mean every country endorses them. The law where you are may well change in the future.
With potentially more crypto exchanges delisting privacy coins, you may struggle to trade your coins in the future.
Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.
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Liam Atkins is a copywriter, blockchain enthusiast and former cryptocurrency broker. In 2017, he personally oversaw nearly $2 million of over-the-counter trades in the UK on behalf of clients before the market crashed in 2018.
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