Evaluation of Spectrecoin and other major privacy cryptocurrencies
This article examines Spectrecoin’s privacy technology and analyses its properties compared to alternative implementations.
Since the creation of Bitcoin, numerous cryptocurrencies have been developed by enthusiasts from around the world. While many of those hardly brought anything new to the table besides simple parameter changes, some projects have identified opportunities for serious innovation. One such area that eventually branched out into its own niche inside the cryptocurrency ecosystem was the focus on privacy.
Privacy is a fundamental human right, in fact over 150 national constitutions mention the right to privacy¹. Yet it is still a topic that can be a cause for controversy. While private individuals generally strive to maximize their personal privacy, trends around the world show an unfortunate development in the opposite direction. In this regard, technology can be a vital shield in maintaining our personal right to privacy against the ever growing gathering of information.
Cryptocurrencies with a focus on privacy
To improve upon the public nature of the blockchain, as it was introduced with Bitcoin, developers have come up with a variety of technological advances that aim to increase the privacy of network participants. The goal of these measures is not only to provide transactional privacy but also to ensure fungibility of the native coins. Fungibility is an important aspect of a currency that refers to the interchangeability of its units, i.e. all coins are equal and worth the same. In a blockchain with a completely public design, fungibility can be severely endangered.
'The best way to understand what make up the Spectrecoin network today is to think of Bitcoin Core + Proof-of- Stake.v3 + anonymous transactions (using dual-key stealth technology and ring signatures) + Tor to hide your IP (all Spectrecoin nodes run as hidden services).'
This concise summary of Spectrecoin is taken directly from the Spectrecoin whitepaper.²
Spectrecoin is based on the CryptoNote protocol, implementing ring signatures to provide anonymity for the sender of a transaction and stealth addresses to protect the privacy of the recipient of a transaction. In Spectrecoin all network traffic is routed via TOR and OBFS4 which additionally shields users’ IP addresses from nosey observers. The dual-coin system of Spectrecoin allows users to make public transactions with XSPEC as well as private transactions with SPECTRE. In addition to the privacy technology implemented in Spectrecoin, its Proof-of-Stake consensus algorithm POSv3 is energy and resource efficient — you can stake Spectrecoin on a Raspberry Pi!
Upcoming changes to Spectrecoin with v3
V3 will introduce many significant changes to Spectrecoin. The implementation of StealthStaking will allow users to earn completely private staking rewards via the staking of SPECTRE. Use of the private SPECTRE will be further incentivized with an increased reward per block (3 for SPECTRE, 2 for XSPEC). This measure will strengthen the privacy of the network and it has the added benefit for holders of leading to a decreasing inflation rate that will go down from the current 5% to slowly sink even below the targeted rate of most western countries (2,5%). A slightly increased blocktime to 96s will ensure efficiency, while new algorithms to solve the ‘ATXO_SET’ dilemma and an advanced ATXO balancer algorithm to solve the ‘ALL_SPENT’ dilemma will maximize network privacy.³
Privacy protocols implemented in cryptocurrencies
The Zerocoin protocol provides anonymity by making transactions unlinkable through the use of zero-knowledge proofs. This allows users to receive coins without any transactional history. The verification of these transactions can be quite resource intensive. Although Zerocoin provides strong anonymity, its need for an initial trusted setup introduces uncertainty.
Zerocoin is used for instance in PIVX and Zcoin. Both, PIVX and Spectrecoin are Proof-of-Stake currencies, have fast transaction times and with the upcoming StealthStaking on Spectrecoin, both will allow private staking. Compared to PIVX, Spectrecoin takes its focus on privacy even further with integrated TOR and OBFS4. The trustless setup of Spectrecoin’s CryptoNote implementation presents a significant advantage over the uncertainty introduced with the trust requiring setup of the Zerocoin protocol.
The CryptoNote protocol uses Ring Signatures that work by taking outputs of other transactions on the blockchain as additional inputs for a Ring Signature transaction. An observer can thus not determine which input actually belongs to the sender of this transaction.
Major cryptocurrencies that are built on the CryptoNote protocol besides Spectrecoin include Bytecoin - the first project to implement CryptoNote, and Monero, which is the most widely used privacy coin today. While Monero can be run over TOR, it does not offer the built-in TOR integration of Spectrecoin and in contrast to Spectrecoin, uses energy wasting POW as its consensus algorithm. To improve upon this, Monero will make use of I2P in the planned upgrade ‘Kovri’. One of Monero’s strong points is its mandatory privacy, meaning all transactions on the network are private by default. Spectrecoin offers a dual-coin system which gives users the choice to create public or private transactions, depending on their needs.
The zero-knowledge proofs, called zk-SNARKs, that are used in the Zerocash protocol allow transactions to be validated without revealing amount data. While it can provide strong privacy with an anonymity set consisting of all minted coins on the blockchain, this comes not without tradeoffs. Zerocash requires an initial trusted setup, private transaction are very computationally intensive and supply can not be audited.
Zerocash is most notably implemented in Zcash. Zcash offers transparent as well as shielded addresses. This results in a certain similarity to Spectrecoin’s dual-coin system. The computationally intensive private transactions in Zcash lead to much higher transaction times than the CryptoNote-based private transactions offered by Spectrecoin. While Spectrecoin provides reliable and trustless privacy, Zerocash is limited by its need for an initial trusted setup.
The MimbleWimble protocol was originally proposed by an anynomous researcher as a concept to improve the privacy and scalability offered by Bitcoin. In MimbleWimble all transactions within a block are combined via CoinJoin. A modified version of Confidential Transactions removes the need for addresses and obscures amount data.
MimbleWimble is currently implemented in Grin and Beam. While both make use of Dandelion to obscure the source IP address of a transaction, this concept does not achieve the full IP protection offered by Spectrecoin’s TOR integration. As the Confidential Transactions in MimbleWimble only hide the transaction graph, this can create a false sense of privacy for users since analysis on the transaction graph is still possible. Ring signatures in combination with stealth addresses as they are implemented in Spectrecoin provide reliable, well-tested privacy.
The idea behind CoinJoin is to combine transactions from multiple users while typically enforcing equal output sizes, thereby making it difficult for an observer to determine which recipient is connected to which sender. Since the transaction is public, the success of this privacy measure depends largely on the actions of the participants. Recombining coins after a CoinJoin, for instance, decreases or even eliminates the previously gained privacy.
Dash, for example, uses a masternode system on top of its POW consensus algorithm, which allows users to earn additional rewards. These masternodes are also responsible for mixing funds via a CoinJoin termed ‘PrivateSend’.
CoinJoins are also used to increase the privacy of Bitcoin transactions and have been growing in usage since the release of WasabiWallet, a privacy-focused Bitcoin wallet.
As a simple privacy measure, CoinJoins only make blockchain analysis harder but participants are still visible and, as stated above, the effective privacy gain depends largely on the actions of all participants in the CoinJoin. Strong privacy technology such as ring signatures and stealth addresses, as they are implemented in Spectrecoin, provide definite and reliable privacy.