Many people view Bitcoin as an anonymous way to make transactions. However, Bitcoin is actually one of the least private types of cryptocurrency. Several other cryptocurrencies are specifically designed to be private and anonymous.
Privacy and anonymity are not the same thing. Privacy means others are unable to see what you are doing, while anonymity means that others know what is being done, but not who is doing it. Bitcoin is a pseudonymous coin. This means that though all of your transactions are visible, it is nearly impossible to trace those transactions from someone’s Bitcoin address to their real-life identity without any additional information.
While some may think private cryptocurrency is only something that would be used for illegal transactions, there are several legitimate reasons to want to use a private coin. One reason would be to hide your behavioral and purchasing patterns from companies. Another reason would be to protect your wallet. Address balances are public, so someone who holds a lot of crypto may be subject to attacks on their server or in person in order to steal their coins.
Physical cash can be considered a private form of economic exchange – only you and the person you give money to need to know the transaction is taking place. There is no way for anyone else to track the spending of dollar bills or to know how many you have in your personal storage.
Here are three of the most popular private cryptocurrencies.
Monero is a private and decentralized cryptocurrency which uses XMR as its coin. Monero obscures the three parts of a transaction. The sender is hidden through the use of ring signatures. The amount of money sent is hidden through RingCT, and the use of stealth addresses hides the receiver. Because the currency is untraceable, the value of the coin cannot be lessened because of its history. It cannot be blacklisted or debased, so all coins have the same value and are interchangeable.
Zcash uses a zero-knowledge proof to prove the information you’re sending to the other party is true without needing to broadcast the information besides the fact it’s true. The cryptography of the coin allows all transaction data to be private and encrypted. However, one issue with this coin is that the privacy function is optional. Only around 5 percent of funds on the network are private, meaning a majority of the transactions can be viewed by anyone. The reason for this is because their method of creating a transaction using a zero-knowledge proof is slow and costly.
Dash is similar to Zcash in the fact that all transactions are not private by default. The platform promises privacy through the use of a modified version of CoinJoin, which is the method originally used to anonymize Bitcoin. To privatize transactions on Dash, a “masternode” server is required. It requires users to trust the server not to record any details about where the outputs are ending up. Users must make a deposit of 1,000 Dash coins to run the masternode. Theoretically, the deposit stops someone from creating multiple nodes to record CoinJoin details. Because the blockchain is transparent by default, there is a chance that coins and addresses can be blacklisted.
Grin is an implementation of the MimbleWimble protocol discussed in an earlier blog post.