Back to Series

What are privacy coins?

What are privacy coins and why do they matter?

Confidentiality cryptocurrencies, most commonly known as "privacy coins", enable users to have complete confidentiality over their transactions and addresses

Confidentiality cryptocurrencies, most commonly known as “privacy coins”, enable users to have complete confidentiality over their transactions and addresses.

When Bitcoin introduced cryptocurrencies to the world, privacy was an important underlying attribute. Of course, we know today that it’s possible to easily link IP addresses and usernames to Bitcoin and Ethereum addresses thanks to metadata. Plus, because all transactions are broadcasted publicly, users lose some privacy features there as well.

There are three main aspects of privacy in the context of cryptocurrencies:

  • the identity of the user performing an operation using the cryptocurrency
  • the transaction data specific to the operation the user is performing
  • the total blockchain state formed by combining the knowledge of all transactions

An easier way to understand the above points is to ask the following questions:
a) Do I know the identity of the user?
b) Can I see the transaction details sent by other users?
c) Can I see all blockchain transaction data and identify which addresses have which amounts?

By answering each of these questions, you can work out if any given cryptocurrency is confidential and private or not.

Privacy coins

Not long after Bitcoin was developed and released, a number of confidential cryptocurrencies emerged with the sole goal of allowing users to transact freely with complete privacy and confidentiality. The five main privacy cryptocurrencies in use today are Monero, Zcash, Dash, Verge, and Grin. A brief analysis of each, when facing the above questions, can be seen below:

Bitcoin Monero Zcash Dash Verge Grin
Public addresses  

YES

 

NO

 

NO

 

YES

 

YES

 

NO

Public transaction details  

YES

 

NO

 

NO

 

NO

 

NO

 

NO

Blockchain analysis possible  

YES

 

NO

 

NO

 

YES

 

YES

 

YES

Privacy technologies

It is helpful to organise approaches to privacy in cryptocurrencies by what techniques they use. There are a variety of privacy-enabling technologies in crypto with completely different working mechanics and goals. The main confidentiality technologies employed by privacy coins today are as follows:

  1. Layer 2 protocols like the Lightning Network, state channels, or Plasma allow small groups of users to transact among themselves “off-chain.” This means all intermediate states are stored between those users and only periodic summaries of state changes are written to the main blockchain. As a result, the intermediate states are invisible to outside observers because they never appear on the main blockchain at all. Of course, the Layer 2 protocol itself can have different levels of privacy for off-chain states among its participants, so this is more of an idea than a full-blown privacy technique.
  2. Ring signatures take inputs and outputs of different transactions and combine them into a single large transaction to obscure links between the addresses of senders and recipients. Monero is one such coin that uses ring signatures to obfuscate transaction information.
  3. TOR uses multi-layered Onion routing as a mechanism to hide users’ IP addresses. This technology is used by privacy coins such as Grin and Verge.
  4. CoinJoins is a mechanism that enables transactions from multiple senders to be batched into a single transaction, similar to ring signatures.
  5. Zero-knowledge proofs refers to data which demonstrates knowledge of a piece of information without revealing the information itself. When used correctly, this cryptographic technique can ensure both privacy of transactions and soundness of the blockchain. An example of a cryptocurrency using this technique is Zcash.
  6. Mimblewimble features confidential transactions that allow for public verification of the transaction without revealing any significant details such as amounts or addresses. This technology also uses CoinJoins and Dandelion, an improved gossip protocol network that contains increased privacy mechanics. It uses hops in-between nodes before publicising transactions to neighbouring nodes. Mimblewimble is the underlying technology of the Grin and Beam privacy coins.

What next?

Want to learn more about privacy coins? Read our definitive guide. 

Recent Guides

What is HIVE blockchain?

Blockchain technology is disrupting industries across the world – but with so many companies utilising the technology it can be difficult to understand them all. HIVE blockchain was previously  known...