2/27/2018 An Overview of Privacy Coins – Hacker Noon

Phil Glazer Follow

Investing @ MGV. Previously @KKR_Co & @UCBerkeley
Feb 9 · 6 min read

An Overview of Privacy Coins

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What is a privacy coin?

Privacy coins are an evolution of cryptocurrencies like Bitcoin. Bitcoin
transactions are anonymous in the sense that the owner of each wallet
is unknown, but every transaction is broadcast publicly and viewable to
all on the public ledger. This means that all transactions for a given
wallet can be seen and audited. Therefore, if a person’s real-world
identity is linked to a Bitcoin wallet address then anonymity is
compromised.

Like Bitcoin, most privacy coins utilize a public ledger for transactions,
but use various means of obscuring the sender and receiver of a
transaction. The leading privacy coins implement di erent solutions to
this problem (which will be pro led in this piece), but the main
takeaway is that the link between sender and receiver for a given
transaction is obscured which prevents tracking the activity of wallet
addresses.

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Why use a privacy coin?

Why are privacy coins needed? As explained, public ledgers are
transparent and show the holdings and activity for a given wallet. In
many situations, this is not a problem and does not need a solution.
However, as Bitcoin continues to be used it is easy to imagine a future
in which more wallet addresses are linked up to real-world identities
and privacy su ers (various ways that this happens are explained
here). Businesses, for example, may prefer to transact with
manufacturers and suppliers in a way that is not broadcast to the public
ahead of a product launch. Additionally, large holders on the Bitcoin
“rich list” (a list of wallets with the greatest holdings) may fear for their
safety if their wallet address is linked up to their real identity. Privacy
coins are designed to solve these issues and grant transaction
anonymity in a decentralized and scalable way.

This guide aims to give an overview of three of the most popular, as

measured by market cap, privacy coins (Monero, Dash, and ZCash) and
how they attempt to secure privacy. This piece is not an exhaustive
examination of privacy tokens and many other promising projects
exist besides those pro led here.

Monero

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Monero is designed to be a private, untraceable currency. On Monero,

addresses (for both sender and receiver) involved in transactions and
transaction amounts are private on the ledger which means that
balances for wallets are also private. Monero implements transaction
privacy using a method called Ring Con dential Transactions ( rst
used in January 2017 and mandated for all transactions after
September 2017), which is an evolution of ring signatures. Without

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having addresses and balances visible on the blockchain, merchants

and individuals can keep their net worth hidden.

Ring Con dential Transactions (RingCT): Monero’s blockchain

protects privacy in three ways. Ring signatures enable the sender to
hide among other transaction outputs, stealth addresses hide the
receiving address of the transaction and RingCT hides the amount of
the transaction. As a consequence, Monero features an opaque
blockchain. This is in contrast with the transparent and traceable
blockchain used by Bitcoin. Thus, Monero is said to be “private,
optionally transparent”.

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Dash

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Dash is based on a Proof-of-Work system that employs two types of

nodes on the network; “masternodes” and “miners.” Masternodes
provide instant send and private send capabilities. Instant send allows
for masternodes to come to a consensus in just over a second, creating
an irreversible transaction. “Private send” uses CoinJoin to cloak the
sender and receiver wallets of a given transaction. Because the network

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is proof-of-work based, there are also mining nodes that compute

hashes in order to cryptographically secure the Dash blockchain. Block
rewards are split amongst three groups with 45% going to the miners,
45% going to the masternodes, and 10% going to the treasury. A “block
tax” goes to dash to continue development and marketing operations.
Dash relies on masternodes to enable private send transaction, but this
type of transaction is not required. Unlike Monero, addresses and
holdings are visible on the blockchain and transactions that are not
executed with private send can potentially be audited.

CoinJoin is a method to anonymize transactions proposed by Gregory

Maxwell. CoinJoin is based on the principle of grouping together
transactions to create joint payments. When a joint payment is made, it
is not possible to to relate input and outputs in a transaction which
prevents third parties from determining the direction and amount of a
transaction. CoinJoin-based mixing methods increase privacy for all
users because it is no longer likely that all inputs to a transaction come
from a single wallet, and hence can no longer be reliably associated
with a single user.

ZCash

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Zcash payments are published on a public blockchain, but users are

able to use an optional privacy feature to conceal the sender, recipient,
and amount being transacted. ZCash allows for anonymous
transactions, but does not require them. As explained by Wikipedia,
“Transactions can be ‘transparent’ and similar to bitcoin transactions in
which case they are controlled by a t-addr, or can be a type of zero-
knowledge proof called zk-SNARKs; the transactions are then said to be
“shielded” and are controlled by a z-addr. Zcash coins are either in a
transparent pool or a shielded pool; as of December 2017 only around

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4% of Zcash coins were in the shielded pool and at that time most
wallet programs did not support z-addrs and no web-based wallets
supported them. Zcash a ords private transactors the option of
‘selective disclosure’, allowing a user to prove payment for auditing
purposes. One such reason is to allow private transactors the choice to
comply with anti-money laundering or tax regulations.”

zk-Snarks: Zero-Knowledge Succinct Non-Interactive Argument of

Knowledge is a technology that allows miners to verify transactions
without knowing who sent or received the coins. Using a cryptographic
hash, each party can prove that a certain statement is true without
revealing the precise details of who sent what and where. Although
most commonly associated with the Zerocoin family, zk-Snarks are also
being tested with ethereum.

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Comparisons

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Conclusion
It will be exciting to see how privacy coins continue to evolve and
implement new solutions to the problem of transaction privacy.
Additionally, it will be interesting to see how regulators respond to the
capabilities that privacy coins enable and what these coins might mean
for the black market.

. . .

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Find more at:

https://twitter.com/phil_glazer

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