An introduction to privacy coins
Have you ever stopped to wonder just how "private" your blockchain transactions truly are?
While most people assume that Bitcoin and similar cryptocurrencies are anonymous, they are, in reality, pseudonymous. In this article, we explore the difference between these concepts and how privacy coins navigate a fine line between the demands for transparency and the individual's right to privacy. Let’s dive in!Introduction to Privacy Coins.
If you understand how traditional blockchains work, you then know how every transaction on their ledgers is public and that, with enough effort, anyone can trace the origin and destination of every coin that has ever been minted and / or transferred. This effectively means that, if for any reason you can link the identity of an individual to their blockchain address, you can then permanently inspect their balance, their asset inflows, their expenses, etc. If you haven’t, you can read our article on How Bitcoin works.
While the transparency of these blockchains is desirable in some cases - think of permanently auditing our governments’ expenses - it is also cause for concern in the context of data breaches and surveillance. Privacy coins aim to address these concerns by offering enhanced anonymity features. Unlike with “regular” coins, transactions made within privacy blockchains are designed to be fully untraceable and completely unlinkable. When you explore a pseudonymous blockchain, you can see how address A sent 10 tokens to address B and then kept 20 tokens after that. When you explore a privacy focused blockchain, you can only see how someone sent something to someone else… no addresses, no amounts, no balances!
Use-cases and Controversies.
In essence, privacy coins are a response to the desire for a more private and autonomous digital financial experience. While this desire can then come from either a righteous demand to hide one’s activities from marketers, governments and hackers, malicious actors might use it to cover up illegal or wrongful activities too.
Privacy coins are controversial for this reason. For every one good example of private donations or sluggish governments, there’s also one good example of illegal trade or money laundering. Notwithstanding the commonly accepted Right to Privacy, privacy coins have been approached antagonistically by governments and regulatory authorities around the world which has led most centralized exchanges to delist them (See example).
Popular privacy coins include Monero ($XMR) and Zcash (ZEC), which work in different ways and under distinct cryptographic principles. Notably, Zcash offers private transactions as an optional, rather than compulsory, feature.
In an age where data has become the new gold, privacy coins will likely find their rightful place in the DeFi ecosystem, providing a balance between transparency and the right to privacy.
While it seems like some CEXs and governmental authorities dislike them, the key to their use lies in responsible usage and well-meaning communities. Speaking of which, if you want to be part of a great one, do join our official Discord Server! Here, you can discuss this and other Web3 related topics with other like-minded people. Hope to see you there!