Popular cryptocurrencies like Bitcoin and Ethereum lack true privacy, exposing transactions to public scrutiny. Privacy coins offer a solution by keeping transactions hidden and anonymous. In this guide, we’ll explore how privacy coins work, why they matter, and what you need to know to protect your financial information effectively in 2024.
KEY TAKEAWAYS
• Privacy coins like Monero and Zcash offer strong anonymity features, protecting users’ financial activities from public scrutiny.
• While privacy coins provide security and discretion, they often come with higher transaction fees and face regulatory challenges.
• As digital privacy concerns rise, privacy coins are becoming increasingly valuable for those seeking control over their personal financial data.
How do privacy coins work?
While similar to regular cryptocurrencies, privacy coins add layers of anonymity to transactions. They still rely on a public ledger, but they make it significantly harder to trace wallet addresses, which is invaluable for those who prioritize privacy.
Here’s how some of the most popular privacy coins and how they achieve this.
1. Monero
The most popular privacy coin in terms of market cap, Monero, utilizes stealth addresses and ring signatures to keep trades anonymous, all under the network’s “CryptoNight” proof-of-work consensus algorithm. Each Monero wallet has a public address that includes a public view key and a public send key. However, transactions are not sent to those addresses.
Monero uses Dandelion++ to obfuscate the origin of transactions on the network, adding another layer of privacy. Additionally, Monero also uses a technology called Ring Confidential Transactions (RingCT) to hide transaction amounts.
Instead, the sender’s wallet utilizes the recipient’s two keys to generate a one-time stealth address and sends the Monero to that newly created one. This stealth address is public so that the blockchain can record transactions, but nobody knows who it’s for aside from the recipient. The only thing the world can see is that there was a transaction.
The recipient’s wallet then scans the Monero blockchain for this stealth address via a private view key that corresponds with the stealth address.
Once found, the funds move to the recipient’s wallet, and no one else is wiser. The recipient can, however, make a transaction visible by sharing their public view key. The sender remains anonymous thanks to Ring signatures.
Monero’s ring signatures are a form of transaction mixing, which more than a few privacy coins use. Upon sending funds, a “ring” of users sign the transaction alongside the sender. That way, it’s nearly impossible to track which is the “real” sender, ensuring anonymity for all.
Bytecoin, another anonymous cryptocurrency built from a Monero fork, also utilizes ring signatures.
2. DASH
DASH is interesting because its primary intent isn’t so much privacy but rather to be a fast digital currency for anyone to use. However, it provides a fantastic privacy feature, PrivateSend, to ensure anonymity for traders.
An entirely optional feature, PrivateSend keeps transactions anonymous via coin mixing, which is done via Coinjoin integration. It starts by dividing up a transaction total into intervals of 0.001, 0.01, 0.1, 1, and 10 DASH. Think of it like breaking down a $50 bill into $10s, $5s, and $1s, etc.
Did you know? CoinJoin is a method of anonymizing Bitcoin transactions, and DASH has implemented it with some modifications.
Then, a DASH wallet will privately inform different masternodes across the network that a private transaction is being made. It will pair this transaction up with other users looking to do the same.
From there, that masternode will mix each “input” and then send it back to the wallet in which it came, only to a slightly different address called a change address, of which each wallet has 1000 to use. This way, nobody can trace the transaction back to the main wallet.
Did you know? The mixing can be done up to 16 times, each time making it harder to track the transaction’s origin. From there, the DASH will be stored in a PrivateSend-specific wallet for users to send. However, it’s worth noting that PrivateSend transactions cost a higher fee than traditional ones, as they take up more space on the blockchain.
PrivateSend is not as private as Monero’s techniques because it relies on mixing coins rather than full anonymity.
3. Zcash
Like DASH, Zcash allows for private or transparent transactions. A transparent transaction works just like Bitcoin does, with addresses and other details recorded on the public blockchain for all to see. Private transactions, however, are encrypted, and only the fact that a transaction has occurred is registered to the blockchain.
Zcash has two different address types: z-addresses and t-addresses. The former facilitates private transactions, while the latter correlates to transparent ones.
Sending a transaction from one z-address to another is considered a private transaction. Z-address to t-address is called deshielding, and the opposite is called shielding. Finally, t-address to t-address is a public transaction no different than most other cryptocurrencies.
Private transactions are possible thanks to zero-knowledge proofs or zk-SNARKs. Essentially, zk-SNARKs allows users to verify that a legitimate transaction was made without revealing how much or to who it was sent.
Zcash has introduced unified addresses, which support multiple types of transactions (including both z and t transactions) under a single address. Plus, Zcash has been working on Halo 2, an upgrade to zk-SNARKs that aims to improve scalability and remove the need for a trusted setup, making it a significant advancement in zero-knowledge technology.
Once a transaction goes through, a “proof” is constructed that proves the sender has the private key that represents the Zcash to be sent. This is enough for verifiers to trust the transaction is real and not a “double-spend” of any sort. They know it’s a valid transaction without needing to know who is making it or where it’s going.
4. Verge
Verge also offers optional private transactions. Those who opt into anonymous transactions will enjoy the benefits of Verge’s “Wraith Protocol.” This protocol consists of two systems: I2P tunneling and IP obfuscation via the Tor network. Both are integrated into Verge, so there’s no need for a third-party option to hide an IP address.
When a Verge user sets the private ledger to “ON” within their wallet, all transactions are run through Tor automatically. Tor ensures information is difficult to follow before it erases that info completely. It encrypts data into layers before sending each one off to a different “relay” around the globe. This makes it nearly impossible to track, hiding a user’s IP address in the process.
As for I2P tunneling, this method allows users to communicate with one another peer-to-peer, ensuring all information sent between two parties remains between them alone.
Verge also supports atomic swaps, allowing traders to convert cryptocurrencies peer-to-peer and eliminating the need for a traditional exchange. Atomic swaps are based on smart contract technology. If two users want to trade funds, both have to place those funds in an escrow service. If the users fulfil that requirement, then the funds are unlocked, and each receives the sent assets from the other trader.
5. Grin & Mimblewimble
Mimblewimble is an altered proof-of-work blockchain protocol based on Bitcoin’s original design. It was designed to solve Bitcoin’s scalability issues. Interestingly, networks built on Mimblewimble don’t have public addresses. This means there’s simply no information to which one can trace a transaction to its origin. Only the two parties participating in a transaction can see the relevant data.
Mimblewimble is a distinct protocol that differs significantly from Bitcoin in terms of its privacy and scalability features. While it addresses scalability issues, its primary focus is on enhancing privacy and reducing blockchain size.
The protocol is built on two fundamental policies: zero-sum verification and private key ownership. The former states that verification can only occur if the sum of the outputs and inputs in a transaction is zero.
That proves that there’s no double-spend occurring, all without revealing the transaction amount. Proving zero also calculates a multi-signature private key, which confirms that the sender has included the right amount of assets.
Grin is a cryptocurrency built on Mimblewimble blockchain technology that enhances its scalability and privacy offerings. Transactions on Grin are automatically deleted over time, thereby increasing the network’s speed but preventing others from potentially tracking them. While this mitigates the ledger aspect of a blockchain network, it’s fantastic for privacy.
Grin is designed to be lightweight and focuses on privacy, but it is also inflationary with no maximum supply, which contrasts with Bitcoin’s fixed supply.
6. PIVX
PIVX is a proof-of-stake DASH fork. It has a similar vision to DASH, though with a different consensus method in place. Also, the asset is community-driven, and PIVX’s network of masternodes contributes to lower transaction fees.
For a brief period, the asset also took advantage of the Zerocoin protocol, which converted the public-facing PIV coin into a private zPIV coin. However, that technology has been disbanded, and the group is now working on a new privacy protocol.
Did you know? PIVX is transitioning to a new privacy protocol based on zk-SNARKs Sapling to replace the discontinued Zerocoin protocol.
Of course, there are many, many more privacy coins with their own technologies behind them. However, the assets above have seen enough success to be of note. Each values privacy in its own way and provides a new idea that can be iterated on for future use.
Why use a privacy coin?
Privacy coins are essential for maintaining financial autonomy, protecting personal and business data, and safeguarding against unwanted surveillance. In a digital age where privacy is increasingly compromised, these coins provide a necessary layer of security and control over financial transactions.
Even if privacy coins aren’t perfect, they allow users to transact online without the whole world seeing. This is useful for businesses and their clientele or personal banking and spending. Privacy should be a right for all, and privacy coins are here to try and provide that.
Is Bitcoin untraceable?
While Bitcoin and other cryptocurrencies are valuable innovations that enable complete control over one’s finances, many of them are not private.
That said, in the case of Bitcoin, one’s information isn’t just thrown on the blockchain for everyone to see. It requires a bit of effort to track. But it’s possible to return a Bitcoin to its very first wallet. One can see how much that wallet has held and potentially track it to the holder.
However, this doesn’t mean Bitcoin is a worse option than privacy-focused coins. After all, adding anonymity features to a transaction slows down its verification time, clogging up networks and slowing scalability. That’s why cryptocurrencies like DASH provide privacy as an option. Users need to weigh whether or not their transaction is worth taking up more space on the blockchain.
What is the best privacy coin?
It’s difficult to classify the most private cryptocurrencies, considering these assets utilize all sorts of different methods. One could consider Monero the best, for example, because it’s the highest privacy coin in terms of market cap. However, this asset has suffered from numerous security flaws since its inception.
Grin might be a more advanced privacy coin, although one user has claimed to have broken through its protocols. Also, an increase in complexity can make using said technology more confusing, and that can be a big turn-off. For example, Bitcoin might not be private, but it’s relatively easy to use.
The point is that each coin has its own pros and cons. Users need to keep up with news regarding their choice of privacy coin and make sure to pick the one that has the features they prefer.
In addition to the well-known privacy coins, several newer projects are making strides in the space in 2024.
Firo (formerly Zcoin) enhances privacy through the Lelantus protocol, allowing users to burn coins and redeem new ones with no transaction history.
Beam, built on the Mimblewimble protocol, offers confidential assets and opt-in auditability, making it both private and user-friendly.
Haven Protocol (XHV) uniquely enables the minting of private stablecoins, allowing users to privately store value in stable assets.
Secret (SCRT) takes privacy to the next level by enabling private smart contracts, where inputs, outputs, and states are encrypted.
Pirate Chain (ARRR) enforces mandatory privacy by utilizing zk-SNARKs for all transactions, ensuring that every transaction is fully anonymous by default.
Are privacy coins completely anonymous?
No privacy coin is 100% anonymous. The policies in place are there to make it very difficult for someone to break through, but it’s never impossible.
Breakthroughs in quantum computing, for example, can damage blockchain security. Because they are so fast, these computers could decrypt the cryptographic algorithms that protect private keys and other aspects of decentralized networks.
Networks have some time to counter this, but until then, they’re becoming increasingly susceptible to hacks as computer speeds outpace blockchain security.
Pros and cons of using privacy coins
Those who want to remain anonymous while trading can choose which methods appeal to them. However, anonymous cryptocurrency has a few pros and cons. Here’s a quick table with the key points.
| Pros | Cons |
| Anonymity | Higher transaction fees |
| Financial security | Stigma and negative perception |
| Protection of personal data | Regulatory challenges |
| Business confidentiality | Limited adoption and usage |
The role of privacy coins in 2024
Privacy coins are essential for those seeking to protect their financial privacy in the crypto space. They offer crucial benefits like anonymity and security. However, users should understand the associated challenges, which include but are not limited to higher fees and regulatory scrutiny.
Overall, privacy coins will likely continue to play a vital role for users who value discretion in their transactions in 2024 and beyond.
Disclaimer: This guide is for informational purposes only and is not intended as investment advice.
Frequently asked questions
What are privacy coins?
How do privacy coins achieve privacy?
Are privacy coins legal?
Disclaimer
In line with the Trust Project guidelines, the educational content on this website is offered in good faith and for general information purposes only. BeInCrypto prioritizes providing high-quality information, taking the time to research and create informative content for readers. While partners may reward the company with commissions for placements in articles, these commissions do not influence the unbiased, honest, and helpful content creation process. Any action taken by the reader based on this information is strictly at their own risk. Please note that our Terms and Conditions, Privacy Policy, and Disclaimers have been updated.
