As Cryptocurrencies joins the world economy with Bitcoin heading the way, there are also concerns for privacy even when it comes to crypto. There are a few privacy coins that focus on having the feature of Confidential Transactions and use different methods to keep transactions private.
Of course, we don't want to condone criminal use of the technology but there are a few reasons why keeping your transactions private is important.
A Public Blockchain
While there is nothing wrong with using a pseudonymous (public) blockchain like Bitcoin and can be beneficial to use, however, because of it being public and wallet balances and address are available for everyone across the globe to see, eventually there is a trail that will link your identity to those addresses if you have used exchanges, cards services or many others that you may have used. Some are still private as they obtained them through early adoption or mining and not use services and prefer it that way. Even though you may not be doing anything illegal, there are those out in the world that is and by knowing private information even such as the amount of wallet leads to becoming a potential target on the internet and in real life.
Real violent crimes in crypto are on the rise and more reports over the years of kidnapping and ransoms are happening across the globe.
Just like your bank account, you don't have it openly shown to the public with your friends and family of how much money exactly you have. Only to the ones you trust. As the latest reports on Sim-Swapping hacks continue to rise, hackers have the ability to target you if you are more known in the crypto space as it has happened to many. Even Twitter CEO Jack Dorsey was a victim of a sim-swapping hack.
Bad actors will use tactics like phishing scams through emails or comments on social media to steal personal information as those in the crypto community become targets.
This is why it is always recommended to hold your private keys and keep them on a secured hardware wallet that is offline (cold) rather than keeping a large amount of crypto holdings on an online (hot) wallet.
Just like users of private messaging apps like the popular iMessage or Whatsapp, their popularity grew because of the privacy feature and the technology behind it of using End-to-End Encryption (E2EE) where only the sender and the recipient are able to view the contents of the message. So if there were someone trying to snoop and intercepted the packet data of the message, all the snooper will have is an encrypted mumbo jumbo that can't be decoded without the encryption keys that the send or receiver has.
Confidential Transactions would be something similar to using E2EE on messaging apps as only the parties involved can see the contents of the transactions protecting everyone.
This goes a step beyond the usual privacy offered by Bitcoin’s blockchain, which relies purely on pseudonymous (but public) identities. This matters, because insufficient financial privacy can have serious security and privacy implications for both commercial and personal transactions. Without adequate protection, thieves can focus their efforts on high-value targets, competitors can learn business details, and negotiating positions can be undermined.
To be clear, confidential transactions are not to encourage any illicit activity and if you have nothing to hide, then nothing to worry but privacy still matters.
As the crypto economy moves towards more transparency, Kraken exchange tweeted last year in January 2019 on law enforcement requests they received for 2018. ShapeShift also followed suit.
There are many variants to implement confidential transactions and various privacy coins have their methods using this technology. Some of the top privacy coins such as ZEC, DASH, XMR, GRIN, PIVX all have these types of feature built-in.
Zero-Knowledge Proofs (zk-Snarks)
The well-known Bitcoin advocate Andreas Antonopolous gives a breakdown of Mimblewimble and on Dandelion Transactions.
As we see Bitcoin Cash receive an implementation of CashFusion that integrates The Onion Router (TOR) protocol, will 2020 be the year for privacy coins? That may be the case as reports of Facebook's Libra coin won't be released in 2020 with a large part of the issue is due to privacy concerns and other global regulations, the importance of confidential transaction on blockchains are important now more than ever.