Cryptocurrencies such as Bitcoin are often referred to as anonymous, but in reality, blockchain technology implies a complete absence of anonymity, because every transaction ever sent remains recorded in the blockchain.
Yet, there exists a category of coins known as privacy coins. These cryptocurrencies implement techniques to obscure transactions on their blockchain, ensuring the anonymity of their users and their actions.
Since anonymity is always a top priority for members of the crypto community, let us examine how anonymous coins work.
Context and Conception
Cryptocurrencies have been game changers in the financial world, introducing decentralized and secure transactions. However, most cryptocurrencies, such as Bitcoin and Ethereum, are not completely anonymous, as blockchain technology makes all transactions public. This has led to the development of a new class of cryptocurrencies, called privacy coins. Privacy coins are designed to protect the privacy of users and their transactions using advanced cryptographic techniques, such as zero-knowledge proofs and ring signatures, to achieve anonymity and confidentiality.
Satoshi Nakamoto claimed his cryptocurrency was anonymous. As it later turned out, by this definition, he meant the user’s ability to not provide any personal information at the time of receiving a digital coin. If today, as in the past, Bitcoins were only mined, cryptocurrency would indeed be anonymous.
However, because of the rules set by major exchanges, many Bitcoin addresses can be linked to real identities. Moreover, because of the special properties of the blockchain, it is possible to confirm the amount of money that the owner sent to the owner of another wallet. It is also possible to determine the specific amount of money in a particular account.
Unlike traditional cryptocurrencies, such as Bitcoin and Ethereum, privacy coins are designed to protect the privacy of users and their transactions. They used advanced cryptographic techniques, such as zero-knowledge proofs and ring signatures, to achieve anonymity and confidentiality.
Anonymous Coins Definition and Use
Anonymous cryptocurrencies are peer-to-peer (decentralized) systems that serve as the unit of account within a network.
Anonymous cryptocurrencies are necessary for those who value privacy in the network. For businesses, privacy and speed of financial transactions are essential. Consumers want privacy.
In 2012, the inaugural instance of an anonymous cryptocurrency known as Bytecoin was introduced.
The concept of privacy within digital currencies has faced considerable scrutiny, largely due to regulatory bodies advocating for AML/KYC requirements. The transparent nature of blockchain enables entities such as intelligence agencies, hackers, and everyday users to trace transactions and unveil the identities of digital coin holders.
Consequently, numerous developers have acknowledged the necessity of developing genuinely anonymous cryptocurrencies to offer users the utmost privacy. This heightened level of privacy is attained through the application of cryptographic protocols, rendering the tracing of transactions on the blockchain challenging or even infeasible.
How Anonymous Coins Work
PrivateSend
At its heart, this technology is a mixer. This method requires the money to be passed through the master nodes. The access to the master nodes, where the data on all transactions made are stored, is limited.
This is the mechanism used in DASH cryptocurrency. However, many people do not consider DASH to be a confidential coin. DASH uses simple blending methods. However, since DASH is a fork of Bitcoin that is not anonymous by nature, in many ways, it’s still an improvement where user privacy is concerned.
I2P and TOR
In this case, anonymous communication channels such as I2P and TOR are used. A transaction is routed through a number of relay nodes, and the real IP addresses of the users and their locations are hidden. However, this increased the risk of hacking. Therefore, this method is not popular.
This mechanism is used in the cryptocurrency Verge.
zk-SNARK
The Zero-Knowledge Proof is a method also known as a zero-disclosure or zero-knowledge scheme. This mechanism makes it possible to prove the authenticity of data without revealing any information about the data itself or its owner. Consequently, this technology makes it impossible to (re)create a chain of transactions.
The user proves ownership of the cryptocurrency without disclosing where it came from. In addition, not only are the participants of the transaction classified, but also the amount.
However, it should be noted that because of the use of special technologies and powerful equipment, commissions here are quite high.
This mechanism is used in the Zcash cryptocurrency.
CryptoNote
In this method, anonymity is achieved through ring signatures, where the sender is masked, and one-time addresses, where the recipient is masked.
A ring signature is an electronic signature in which a transaction is signed by a large group of potential signers. Consequently, it is impossible to determine who truly signed the transaction.
This mechanism is used in cryptocurrencies Monero and Bytecoin.
Anonymous Coins Examples
Monero (XMR)
This coin was one of the first cryptocurrencies to offer anonymity to its owner. The CryptoNote technology used to create this coin was developed in 2014. It immediately became popular, and the Monero coin is still actively in demand.
Many consider the Monero coin one of the most popular anonymous cryptocurrencies. The privacy of XMR is extremely high. Even the United States Internal Revenue Service (IRS) pledged to reward whoever manages to crack it: a reward of $625,000 was promised.
Pros:
- High privacy level
- Popular and actively in demand
Cons:
- Heavy on resources
- Limited scalability
Zcash (ZEC)
Zcash is a decentralized payment system and a coin of the same name (the system’s unit of account). To achieve confidentiality, the zero-knowledge Succinct Non-interactive ARgument of Knowledge (zk-SNARK) mechanism was used. In other words, this method allows us to confirm the authenticity of a transaction without revealing any personal information.
Pros:
- High privacy level
- zk-SNARK mechanism allows for authenticity confirmation without revealing personal information
Cons:
- Heavy on resources
- Limited scalability
Komodo (KMD)
Komodo Coin is a fork of Zcash. This means that it also uses a zero-disclosure proof of stake method for anonymity. In addition, this technology uses a Delayed Proof of Work (dPoW) protocol. The Komodo coin is built on Bitcoin’s privacy rules. By leveraging the impressive hash rate of the Bitcoin network, Komodo increased security and anonymity.
Pros:
- Uses zero-disclosure proof-of-stake method for anonymity
- Uses Delayed Proof of Work (dPoW) protocol for increased security and anonymity
Cons:
- Limited adoption
- Limited scalability
Verge (XVG)
Verge (XVG) is a cryptocurrency derived from Dogecoin through a fork. In contrast to other projects that rely on cryptographic techniques for ensuring anonymity, Verge achieves privacy by leveraging I2P and TOR networks. These networks obscure users’ true IP addresses and mix their traffic. Some users have expressed concerns about this approach as it creates a dependency on numerous relay nodes, heightening the risk of potential hacking.
Nevertheless, the implementation of the Wraith protocol offers users the flexibility to opt for either public or anonymous transactions. In the latter scenario, stealth addresses are utilized to conceal transfer data.
Pros:
- Utilizes I2P and TOR networks to enhance privacy
- Wraith protocol enables choice between public and anonymous transactions
Cons:
- Network’s reliance on multiple relay nodes
- Elevated risk of hacking
Bytecoin (BCN)
Bytecoin was developed in 2012 and is considered the first anonymous project that gave impetus to the development of a whole direction in the cryptocurrency industry. Monero and other anonymous coins originated from Bytecoin.
The anonymity of transactions in the system is achieved using ring signatures, which combine different signatories in a single transaction. As a result, neither the sender nor the recipient of the funds can be identified. In addition, Bytecoin users can generate a large number of one-time addresses from a single wallet, which makes it difficult to establish links between different addresses in the network.
Pros:
- Uses ring signatures for anonymity
- Generates a large number of one-time addresses from a single wallet
Cons:
- Limited adoption
- Limited scalability
Pros and Cons of Anonymous Coins In General
Pros:
- Protection of personal data: personal information, transaction history, and payment details
- Financial transaction confidentiality
- Minimizing the risk of theft of funds
- Addresses general concern for privacy on the Internet
Cons:
- Easy to use in criminal activities: purchase of drugs and other illegal goods, money laundering
- Pressure and increased scrutiny from governments and financial regulators
- Attackers use specialized software to mine such tokens at the expense of the computing power of ordinary users
- Increased transaction size
- The higher fees are due to the use of more powerful hardware
In Conclusion
Privacy is a constant race between cryptographers and hackers, and there is no such thing as absolute privacy.
Therefore, it is important to realize that the privacy mechanisms that have worked yesterday may not be effective. New coins and technologies are being created that allow personal information about the sender and recipient, as well as the transaction terms, to be hidden. Anonymity on the Internet has become an everyday reality, and users do not give it up.
Despite government bans and restrictions, experts believe that most cryptocurrencies will remain anonymous in the near future.
Time will tell whether digital currencies with a higher level of privacy will be able to withstand the regulatory pressures. However, the growing desire for privacy in society leads to optimistic predictions.