What are privacy coins?

Privacy-focused cryptocurrencies are peer-to-peer payment systems with their own unit of account, designed to ensure full confidentiality of financial operations through cryptographic protocols that greatly complicate, or make impossible, the auditing of network data.

Among the largest by market capitalisation are Monero, Dash and ZCash.

Monero is a peer-to-peer payment system with a namesake unit of account built on the CryptoNote cryptographic protocol, which ensures transaction anonymity through ring signatures and stealth addresses.

The CryptoNote protocol was created by a person or group using the pseudonym Nicolas van Saberhagen and was first implemented in the cryptocurrency Bytecoin, from which Monero is a fork [April 2014].

Originally, data obfuscation in the Monero network was achieved by mixing transaction inputs from different senders, generating one-time addresses for each transaction and hiding the transferred amount.

In October 2018 the Monero developers executed a hard fork activating the Bulletproofs protocol, designed to sharply reduce the size of anonymous transactions and fees by replacing the RingCT mechanism [ring confidential transactions], which required heavy computation on the full node side.

The Monero network uses a Proof-Of-Work consensus algorithm oriented toward GPU miners. In April 2018 the developers carried out a hard fork aimed at countering ASIC devices.

Despite its high level of privacy, if attackers manage to seize control over most of the network during an attack, transaction deanonymisation is possible.

ZCash is an open-source peer-to-peer payment system with a namesake unit of account developed by the Zerocoin Electric Coin Company. Based on the Zerocoin and ZeroCash protocols from cryptographers at Johns Hopkins University, it focuses on transaction confidentiality via the zero-knowledge proof protocol zk-SNARK.

zk-SNARK allows users to verify the validity of so-called shielded transactions without revealing the parties and the amount, leaving only timestamps public. All coins are fungible, and tracing their provenance is impossible.

Users can also conduct transparent transactions from public addresses if they wish to save on fees; however, balance information will be hidden if the recipient is a shielded address.

At the end of October the ZCash network underwent the Sapling hard fork, aimed at substantially shrinking transaction sizes, speeding them up, moving to a new address format and achieving privacy by default. The update enables users to make shielded transactions from light clients.

The ZCash network uses a Proof-Of-Work consensus algorithm oriented toward GPU miners, but developers have not yet implemented protection against ASIC devices, although corresponding software is being developed by the non-profit ZCash Foundation.

Dash is a peer-to-peer payment system with a namesake unit of account that appeared under the name XCoin as a fork of the Bitcoin protocol in January 2014. Until March 2015 it was also known as Darkcoin.

Dash is distinguished not only by transaction anonymisation but also by the use of masternodes, which share block rewards equally with miners. An operator must post 1,000 DASH as collateral to reduce the incentive to act maliciously toward the network.

To provide transaction privacy, Dash employs the PrivateSend mixing mechanism based on CoinJoin [see “Top 8 new technologies to protect anonymity on the Bitcoin network”]. Random masternodes mix coins over a set number of rounds [recommended — 4], obscuring the link between sender and recipient.

Dash users also have access to InstantSend for instant payments at a higher fee. Transaction inputs using InstantSend are evaluated by a quorum of 10 masternodes, which decide whether to confirm or reject the transfer.

The Dash network uses a Proof-Of-Work consensus algorithm based on the X11 hashing algorithm and the specialised Dark Gravity Wave difficulty-adjustment algorithm, which is based on the законе Мура.

Advances in browser extensions and malware allow the computing power of personal computers and mobile devices to be used for mining privacy coins, chiefly Monero. Some of these tools also harm the devices they exploit.

Privacy coins allow attackers who breach trading platforms or extort funds via specialised malware [for example, WannaCry] to hide the movement of stolen money. Japan’s Financial Services Agency (FSA) required bitcoin exchanges to delist Monero, ZCash and Dash. The US Secret Service has also spoken about countering privacy coins.

On the technology side, criticism mostly centres on the size of private transactions, which demands substantial storage from a full node. The aforementioned updates in Monero and ZCash are gradually addressing this.

In 2018, privacy coins based on the MimbleWimble algorithm appeared — Grin and Beam.

The BitShares platform offers confidential transactions combined with stealth addresses [see “Privacy in cryptocurrencies: main methods and their application”].

In the ZenCash, or Horizen, network — a branch of a ZCash fork — the zk-SNARK protocol is also used, with the ability to send private messages along with shielded transactions. ZenCash was the target of a successful double-spend attack.

Verge employs an IP address anonymiser and the Wraith protocol to conduct private transactions. The Dash fork PIVX also uses the Zerocoin protocol to hide all transaction metadata.