Now and then I occasionally talk about privacy-related matters and why I think this is so important. Now I want to talk about why are one of the most popular cryptocurrency in the crypto world privacy coins. As I have said before in a recent article, for example, Bitcoin and Ethereum cannot offer complete anonymity. And now these privacy coins want to close this big gap what Bitcoin and Ethereum leave behind. I therefore find privacy coins indispensable. At the time of writing, there are many different privacy coins, each of which has a very good system to protect your privacy.
You can say that Blockchain and the Internet are one of the most beautiful inventions ever made. it gives a lot of advantages but certainly also has many disadvantages. A disadvantage of this is that everything is public and transparent for other users of the Blockchain and the Internet.
If I now give you as a reader my Bitcoin address and you send bitcoin here, you can see how much Bitcoin is on this address. you can also see what happened in terms of transactions. Bitcoin also keeps a so-called ledger that can be completely withdrawn from the first Bitcoin that was also sent You can look this up via the block explorer and you can see how many Bitcoins I have, how many I sent and how many I received.
What are privacy coins?
As you have already read above, Bitcoin and Ethereum are not privacy coins. They do provide a kind of privacy, also known as pseudo-anonymity.
This actually means the following: pseudo-anonymous in the case of Bitcoin, making payments under a false name. You can compare this with names that are used in the wrestling world or artist world. This is also the wallet address under which you make pseudo-anonymous transactions. You can use multiple wallet addresses for this, but this. still doesn't make it anonymous enough. Because your first used address can be traced back to all these new used addresses.
Now these so-called Privacy Coins ensure that this is remedied. So you can no longer track the transaction history. This allows you to send transactions anonymously, receive anonymous amount of coins and send them.
How do these privacy coins ensure privacy?
Different cryptographic encryption methods are used. Below I will mention a few:
- Ring signatures (Monero)
- Stealth addresses (Monero)
- Zk snarks (Zcash)
- CoinJoin (Dash)
- Zero-knowledge proof (Zcoin)
But there are many more different methods. I have explained a method deeper. Here you will read it again:
How does Zero-knowledge proof work?
Zero-knowledge proof is a cryptographic method that Zcoin uses. In this way you can say that something is true without having to tell what the details are.
To give an example here, for example, take $ 10 million. Now you can demonstrate through this Zero-knowledge proof method that you own $ 10 million without having to prove that it really is yours and you don't have to reveal the history of the transactions.
As a result, this way of cryptography fits in with the safe use of the blockchain. On a public. blokchain can see everyone from where, how and how many transactions have been made. In other words you can see the whole history of this. Zero knowledge proof ensures that you as a person can simply demonstrate that you have completed a certain transaction without the need to provide more information. On a public blockchain, everyone needs to be able to verify the authenticity of transactions, which is why every transaction is posted so that everyone can see its full history. This keeps the privacy high, but also the coordination of the transactions.
As mentioned earlier, these zero-knowledge proofs enable us to burn coins in order to be able to create new coins afterwards without any transaction history.
Now it is not important for this article how the technology behind these ways works. Each coin has its own way of offering complete anonymity in a certain way. Now it is of course discussed whether this is real anonymity. Each coin is somehow criticized by one of their opponents. As, for example, Verge was accused in the past of not being able to offer the option of not being completely anonymous when using it. Now you may wonder why anonymity is so important in the world of making transactions.
Take as an example that you want to make a donation to a party but you want to remain completely anonymous.
Privacy coins make this possible. This allows the counterparty to guarantee his or her anonymity because you cannot see how much money has been donated. But you as a danateur also remain completely anonymous, because it is not possible to see how much you have donated. This may be desirable in many cases. Now, of course, it is also the case that governments want as much transparency as possible or want all transparency. This is to prevent illegal practices.
It is therefore easy to consider that this pseudo-anonymity will be further broken down in the future. Blockchain should actually provide more financial freedom and more anonymity. However, should the above take place in the future, the exact opposite will happen.
What about fungibility?
Full transparency can compromise fungibility. Before I explain this, we first look at what Fungibility is.
What exactly is fungibility? In short, this means that crypto coins should always be interchangeable. For the Dollar this means that 1 Dollar will always have the value of 1 Dollar. In the case of Bitcoin, this means that 1 Bitcoin will always be worth 1 Bitcoin.
Now back to my story why fungibility is important. You may wonder why one Bitcoin would be worth more than another Bitcoin. In the case of stolen Bitcoins, some exchanges or stores may not want to accept them. Which would decrease the value of these Coins. A clean Bitcoin that will be worth more because of this. And a freshly loved Bitcoin will be even more valuable.
Now it is true if a cryptocurrency is not fungible then it takes a lot of time to check the background of this cryptocurrency. Now this is something you don't want in the case of cryptocurrencies because you want to be able to execute transactions quickly. Privacy coins have been created to stop this full transparency.