Privacy Coins Exposed and Explained: Full Guide w/ Examples

Contrary to popular belief among many uninformed individuals, both cryptocurrencies and blockchain are highly transparent. Most blockchains keep permanent records of every transaction since their inception, which are visible to everyone. So, when someone wants to maintain their anonymity in the crypto sphere, they need to use a privacy coin.

But how exactly does this type of coin work, and why was it designed in the first place? Is it just a financial tool for criminals, or are there genuine use cases for retail investors like yourself? Are privacy coins even legal in the first place?

In this article, we’ll explore the ins and outs of privacy coins, from the mechanisms they employ to keep their owners anonymous to examples of the most popular cryptocurrencies. Let’s get started!

What Are Privacy Coins?

Privacy coins, by definition, are a specific type of cryptocurrency that comes with privacy-preserving technology. However, they share many similarities with regular crypto. Privacy coins also operate on blockchains and utilize their security features to make transactions safe and immutable.

However, while the vast majority of blockchains are transparent, privacy coin networks employ various tactics to keep their owners anonymous and obscure the details of transactions. This starkly contrasts with Bitcoin, for instance, which, despite the common misconception, is fully transparent.

At first, many considered Bitcoin to be private due to its differences from traditional finance currencies, like fiat. However, all transactions and addresses on the Bitcoin network are public. Once someone connects an address to an identity, they can keep track of all past and future activities of that person or entity.

The idea for a privacy coin appeared in 2013 in a white paper written by Nicolas van Saberhagen. It was implemented in 2014 for the cryptocurrency named Monero (XMR), with several other digital assets following suit.

Privacy coins came as a response to financial scrutiny from banks and governments. They attracted a tight-knit community of cypherpunks who advocated for financial freedom, independence, and privacy.

Today, most news surrounding privacy coins mentions illicit activities these cryptocurrencies enable. As a result, there is plenty of legal and regulatory uncertainty, along with an ongoing debate on their viability and privacy in the digital age.

How Do Privacy Coins Work?

Privacy coins work by utilizing a couple of different methods to keep wallet addresses hidden and transactions untraceable. Here are some of the critical tools that make privacy coins possible:

• Stealth addresses are for one-time use and are generated for each new transaction. That way, they prevent any inquisitive party from looking back into the crypto holder’s transaction history after discovering one address.
• Ring signatures facilitate anonymity by mixing the individual keys of multiple users together. Essentially, they are making a ring of account keys where it’s almost impossible to discern who owns what.
• Zero-Knowledge Succinct Non-Interactive Argument of Knowledge (zk-SNARK) represents a method of validating cryptocurrency ownership without revealing any information regarding private keys or interacting with the verifier.

Privacy coins often combine several different methods to achieve total anonymity. For example, Monero transactions use stealth addresses and ring signatures to hide an actual transaction among multiple fake ones.

On the other hand, Zcash uses zk-SNARK to keep its transactions shielded yet verified on the blockchain. Moreover, this cryptocurrency (among several others) allows holders to choose whether they want to perform private or public transfers by turning the transparency mode on or off.

Privacy Coin Examples

To better understand this type of cryptocurrency, we’ve created a list of examples of the most commonly used privacy coins.

#1. Monero

Monero (XMR) is the biggest and most popular privacy coin by market cap. It is also the first cryptocurrency designed with a focus on anonymity. Confidentiality is at the core of Monero since most of the development team remains anonymous. In fact, some speculate that Satoshi Nakamoto themselves developed XMR.

The unique characteristics of Monero, combined with its decentralization, make it a go-to privacy coin for many users. Many governments around the world spent hundreds of thousands of dollars trying to figure out ways to discover Monero users and crack its code.

#2. Dash

Dash (DASH) stands for “digital cash” and was designed to be similar to fiat cash in terms of anonymity. It was created as a fork of Litecoin, which itself is a fork of Bitcoin. The goal was to have a more efficient, faster, and private version of BTC. Initially called XCoin and then Darkcoin, Dash was quickly rebranded in an attempt to have a positive image.

One of its creators, Evan Duffield, has a history in finance and software development. He came up with the idea for Dash in 2012 while looking for ways to make Bitcoin anonymous. Today, this cryptocurrency’s goal is to be a scalable and user-friendly payment solution for retail investors and institutions.

#3. Zcash

Zcash (ZEC) is another privacy coin based on Bitcoin’s code but with built-in privacy features. It uses the zk-SNARK protocol to verify transactions without revealing details about the participants. That way, the blockchain doesn’t record information about the sender and recipient or the amount of crypto transferred.

The key characteristic of Zcash is that users can choose between a transparent and shielded transaction. A transparent transaction functions the same way as any regular cryptocurrency transaction, and all the information gets recorded on a public ledger. That gives more options to Zcash holders and increases the token’s utility.

#4. Oasis Network

Oasis Network (ROSE) is a Layer-1 privacy-oriented network built to accommodate an entire DeFi ecosystem. High throughput and low fees make the Oasis Network perfect for everything from DeFi gaming to NFTs and Metaverse. The project already has significant partnerships with major brands like Meta and BMW.

#5. Worldcoin

Worldcoin (WLD) aims to be a global identity network. To gain access, participants need to be scanned with a physical device called the Orb, which creates their World ID. Essentially, World ID should help users verify their “humanness” in an increasingly AI world. On the other hand, the network utilizes zero-knowledge protocols to maintain everyone’s anonymity.

Are Privacy Coins Legal?

The legality of privacy coins is an ongoing debate and varies between countries and jurisdictions.

Japan, Australia, and South Korea have implemented a privacy coin ban, which resulted in centralized exchanges having to delist them. In 2023, Dubai passed new laws and regulations regarding privacy coins, prohibiting those digital assets whose transactions can’t be traced.

The European Union is also working on creating a uniform legal framework regarding crypto assets. Their endeavors regarding consumer protection and money laundering prevention might result in a privacy coin ban. The explanation is that these cryptocurrencies are often used for various criminal activities.

Many big centralized exchanges started delisting the most popular privacy coins ahead of the implementation of these rules. Bittrex, BitBay, and Huobi all removed several of these cryptocurrencies from their offers, and Kraken delisted Monero in the UK.

Ultimately, privacy coins aren’t outright banned worldwide, and it’s almost impossible to prevent peer-to-peer transactions outside of centralized exchanges. Still, intense regulatory scrutiny leaves many users wondering about the future and viability of these digital assets.

How to Choose a Privacy Coin

Choosing a privacy coin involves considering several different aspects. Since there are multiple options, you should choose the one that best suits your needs and circumstances. Here are the factors to consider:

• Anonymity. Different privacy coins feature varied levels of anonymity. Some utilize combinations of stealth addresses and ring signatures to make transactions and wallets untraceable. In contrast, others employ protocols like zk-SNARK to authorize transactions without revealing any information about the involved parties. You should consider these aspects depending on how you plan on using your crypto.
• Underlying technology. The technological aspects of a privacy coin include the network’s consensus mechanisms, security features, potential vulnerabilities, user-friendliness, features, and more. All this is especially important to crypto enthusiasts who plan on holding or using privacy coins in the long term.
• Adoption levels. Widespread adoption and community support are some of the strongest indicators of the longevity of any cryptocurrency. While there’s no precise way of measuring adoption levels, some of the best signs are plenty of liquidity on exchanges, frequent mentions on social media and other online platforms, regular updates from the development team, and so on.
• Regulatory compliance. Differences between privacy coins also impact how they are viewed by law and regulators. Some prominent cryptocurrencies are already banned in certain countries, and more might follow suit. As a result, it’s important to do research, as rules and regulations change all the time and are often location-based.

Challenges of Privacy Coins

One of the most significant risks related to privacy coins stems from regulation. The crypto space as a whole is under ongoing regulatory scrutiny from centralized authorities. These authorities see privacy coins as potential financial instruments for illegal activities, which increases the effort put into their inspection.

Some countries have already banned privacycoins, and there are strong indications that others are going to as well. If the trend continues, the pressure can lead to the delisting of privacy coins from many major centralized exchanges, which will have a detrimental impact on their adoption.

The core philosophy behind privacy coins clashes with the principles of traditional finance (TradFi). While privacy advocates and cypherpunks see these digital assets as a means of escaping the influence of centralized authorities, others criticize privacy coins for their potential to facilitate tax evasion, money laundering, and many other criminal activities.

Another set of challenges that privacy coins face is increased complexity. Many investors still struggle to understand the basic concepts of blockchain, crypto wallets, and self-custody with even the most popular cryptos, like Bitcoin. Additional privacy aspects, features, and protocols surrounding privacy coins further complicate them.

The Future of Privacy Coins

The future of privacy coins is still being determined. Some of the key strengths of these digital assets are also sources of their biggest weaknesses. While cypherpunks advocate for anonymity and independence from TradFi, that would mean ignoring transparency, which is one of the main characteristics of blockchain.

This lack of transparency raises issues of trust, even among veteran crypto participants. On top of that, centralized banks and government bodies closely monitor every privacy coin that appears. Since individuals and entities can use privacy tokens for illicit activities, chances are they will only see more severe regulatory scrutiny going forward.

All of this stands in the way of a broader adoption of privacy coins. As technology evolves, we might see solutions that could alleviate these issues. Enhanced usability coupled with options to control privacy features could result in privacy coins finding a middle ground between confidentiality and regulatory compliance.

Key Takeaways

Now you know that Bitcoin is, contrary to popular belief, actually one of the most transparent digital currencies and that privacy coins are a whole different beast. In the complex and intricate world of cryptocurrencies, these digital assets are the embodiment of secrecy and anonymity.

However, their biggest strengths are also the barriers to their adoption. Since privacy coins have a lot of potential for misuse and criminal activity, regulatory bodies do everything they can to prevent that, often resorting to straight-up banning.

Still, the demand for privacy keeps growing in an increasingly online society, as does the need for these assets. It’s difficult to tell what the future holds, but you should definitely keep an eye on privacy coins!