Which cryptocurrencies are privacy-friendly, and what makes them tick?
Bitcoin is synonymous with cryptocurrencies – like Hoovers are with vacuum cleaners or Heinz with ketchup. In turn, cryptocurrencies are considered privacy-friendly almost by default. Yet those who want to keep their transactions a secret should shun Bitcoin as vampires shun garlic and instead pick one of the private crypto chains.
Here is what is wrong with Bitcoin.
Your bitcoin purchases are not as hidden as you think
It is true that you can somewhat hide your transactions behind Bitcoin: the addresses you send money to don’t contain personal details, and neither do the records of the sales. Furthermore, Bitcoin is a P2P network consisting of thousands of nodes, and the data that constitutes the transactions takes random paths. This certainly isn’t the best terrain for tracking money, but seasoned trackers have their ways.
The fact that you can see all the Bitcoin transactions that have ever occurred makes it possible to perform analyses and link transactions to addresses, wallets, and people. Also, someone controlling many nodes on the Bitcoin network may be able to trace them to an IP address, limiting your level of anonymity even further.
Those doubting whether this is a real threat need look no further than the fact that many governments have invested money in blockchain analysis software, so as to take Bitcoin payments out of the shadow.
Top six private cryptocurrencies
If you want no one to find out about a payment you’ve made, Bitcoin is not to be trusted. Fortunately, many cryptocurrencies have solved the privacy issues of Bitcoin. Here are some of the best and most popular.
There are good reasons why Monero is the largest of the private cryptocurrencies and No. 14 in total with a market cap of almost USD$1.4 billion (as of July 2019). It obfuscates identities and transactions through a combination of great features: ring signatures mix up transaction inputs, making it extremely difficult to link subsequent transactions; stealth addresses make it impossible to tell where a transaction is going to from the outside; ring confidential transactions hide the transferred amount.
All these characteristics turn Monero into a leader among privacy-first cryptocurrencies.
Based on the Zerocash protocol, Zcash launched in 2016 and presented an enjoyable private alternative to Bitcoin. This fork of Bitcoin is currently the third-biggest private cryptocurrency in terms of market cap (almost $500 million as of July 2019), and one of the most formidable in terms of the anonymity it provides.
An exciting characteristic of Zcash is that the users get to choose whether they want to make a transparent or secret transaction. In essence, this cryptocurrency allows you to make “regular” transactions similar to Bitcoin, where the money trail can be followed without much of a hassle.
Zcash relies on the zk-SNARKs protocol – a type of zero-knowledge proof – to make shielded transactions. When you make one of these, all the details (sender, recipient, amount sent) are encrypted.
The fact that Zcash uses zero-knowledge proofs requires it to be initially set up by a trusted entity.
Komodo is a very ambitious crypto project, created to facilitate crypto exchanges between different blockchains. This is done via a process known as atomic swaps, which allows a decentralised way to trade one cryptocurrency for another. Komodo is a smaller, less known cryptocurrency, which currently has a market cap of approximately $156 million.
Small though it may be, Komodo is formidable for those with a need for anonymity. As a fork of ZCash, Komodo relies on the same method for providing privacy to users – the zk-SNARKs protocol. Komodo also allows you to make both transparent and “shielded” transfers (the latter made using a feature called Jumblr).
Dash (short for “digital cash”) is a pioneer in the private crypto world, being the first to combine proof of work and proof of service consensus protocols. It’s the second biggest privacy-centric crypto after Monero and has a market cap of more than $900 million. Although its use in various darknet markets has declined, Dash remains an essential alternative to Bitcoin.
Dash is unique among cryptocurrencies in several ways, the most important of which is a feature called PrivateSend. This makes tracing transactions exponentially harder than with Bitcoin because coins are swapped around using a method called CoinJoin. Basically, instead of you paying the intended recipient, you pay someone else awaiting payment, whereas the payer in that transaction provides the input on your behalf. This removes one of the most critical weaknesses of Bitcoin – the path of an input can be traced by merely looking.
Dash is indeed less private than the others discussed on this list, but its size makes this crypto difficult to ignore.
Zcoin was the first cryptocurrency to fully implement the Zerocoin protocol, solving one of the primary issues with Bitcoin – the traceability of transactions. With Zcoin, the money does not travel from one block to another. Instead, it is traded for a Zerocoin and later redeemed for a new coin; thus there is no record of where the money came from. While there are many benefits to Zcoin, one negative is that is doesn’t hide transaction values.
The success of Zcoin has inspired others to try their implementations of Zerocoin, one instance of which we will discuss now.
PIVX (Private Instant Verified Transaction)
PIVX (Private Instant Verified Transaction) is often called a hybrid between Dash and Zcoin. It’s a fork of Dash but with additional features that make it much more privacy-friendly. It was created to solve essential problems with Bitcoin, such as the lack of privacy and difficulties to scale. At $27 million market cap, PIVX is smaller than other cryptocurrencies, but it is very agile.
PIVX uses zPIV, which combines Zerocoin with the proof of stake consensus algorithm. This has several benefits over the much more common proof of work algorithm – mainly, transactions are quicker and transaction fees are low because they are confirmed by stakeholders or “masternodes” and thus there’s no need for miners. Stakeholders must have a stake of 10,000 or more PIV.
This cryptocurrency has the same negative as Zcoin – it doesn’t obfuscate the transaction values.
The product I want doesn‘t accept private crypto; what do I do?
Currently, many vendors still don‘t accept even the most popular crypto, let alone something as small as PIVX. It is possible to minimise your exposure when using Bitcoin, but you‘ll have to take the necessary precautions.
Use a VPN.
There are situations where your IP address can give you away, even despite the randomised route of data on the P2P network. This is precisely why a VPN is invaluable in such cases – it reroutes all your traffic through a remote server, effectively changing your IP address.