Neither Bitcoin nor Ethereum meet all of these requirements. Various tools work on top of the standard means of these cryptocurrencies and improve their privacy properties, such as crypto mixers or tumblers, but their use requires some effort and may not be for everyone. Why?
The crypto mixing service mixes transactions from different users with each other, so it's not clear who sent the money to whom. One way to gather a lot of users who want to make a transaction is to use a centralized service, but then you have to trust the service completely. In addition, in some countries, regulators often frown upon the use of mixing services.
The second option is a peer-to-peer service where users find each other and do a transaction together, but then you need to have enough participants who want to do a transaction at the right time. What is the cost of privacy?
As we know, there is no such thing as a free lunch, which also applies to private cryptocurrency. When we talk about such coins as Monero or Zcash, their transactions use additional cryptographic primitives to ensure privacy, which increases the size of the transaction. A typical Monero transaction is many times larger than a transaction on the Bitcoin blockchain.
Encrypting and decrypting data when accepting and sending transactions or opening a wallet takes longer in private protocols than in Bitcoin or Ethereum. Larger transaction sizes mean transfer fees in such systems are typically higher than in other blockchains. Why are Bitcoin and Ethereum not private?
Many people assume that cryptocurrency transactions are untraceable by design. After all, they are decentralized and not regulated by banks or financial institutions. However, not all cryptocurrencies are private.
For example, Bitcoin or Ethereum transactions are traceable and linkable because they're stored on a public ledger. Your privacy is limited because you do not need to provide your personal information (passport or ID) to receive and send money. At the same time, all transaction history and wallet balances are publicly stored on the blockchain. They can be downloaded and analyzed by anyone through wallet verification services such as Elliptic or Blockchain.com.
As long as a user sends and receives money without revealing his identity to others, their transactions are completely private. But as soon as their transaction is linked to the IP address of a home laptop, for example, or if they transfer money to a friend who knows who made the transfer, the entire transaction history of the wallet may no longer be private. Examples of privacy coins
Today, there are several privacy coins, each taking a slightly different approach to privacy. Let's take a quick look at the most common ones. Monero
Monero is one of the first privacy coins, released in April 2014 as a fork of Bytecoin
, and is a coin focused on increased transaction privacy. The main technologies used to provide this transaction privacy are Stealth Addresses, Ring Signatures, and RingCT. Stealth Addresses provide automatic one-time addresses for each transaction; Ring Signatures allow transactions to be signed without the ability to identify the sender and recipient; and RingCT allows the amount of money sent in a transaction to be hidden.
Monero uses the Proof-of-Work consensus algorithm. Because each transaction is private, Monero cannot be traced. This makes it a truly fungible currency. Zcash
Zcash started as a privacy-focused cryptocurrency that is based on Bitcoin's codebase. The first release took place in October 2016. It uses the zk-SNARK (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge) protocol, based on zero-knowledge proof, to provide anonymity in transactions.
Zcash has two types of addresses: private (z-addresses) and transparent (t-addresses). It is possible to transfer money between different types of addresses (Z-to-Z, Z-to-T, T-to-Z, and T-to-T). Only Z-to-Z transactions are completely private. T-to-T transactions are public and work like Bitcoin. All other transactions fall somewhere in between. Like Monero, Zcash uses the Proof-of-Work consensus algorithm.
Zcash is the first and probably the most popular coin to use zero-knowledge proof to anonymize transactions. Dash
Dash started out as a Bitcoin fork, with its first release in January 2014. Dash is not a fully private coin because it only provides an additional level of transaction privacy compared to currencies like Bitcoin.
The Dash network has special dedicated Masternodes that allow for PrivateSend and InstanseSend transactions. PrivateSend uses CoinJoin technology to anonymize transactions. CoinJoin allows the inputs and outputs of multiple coin transfers from different users to be mixed in a single transaction, making it difficult to analyze who was the source and recipient of a particular transfer.
CoinJoin does not provide complete privacy: senders and receivers are displayed on the blockchain. In addition, transactions can be identified using special transaction analysis tools. Beam
Beam is an original project, not a fork of any other project, released in January 2019. The idea behind Beam is to create the best possible privacy coin without compromising usability.
At its core, Beam uses the Mimblewimble protocol. Mimblewimble combines cryptographic protocols such as Confidential Transactions (CTs), CoinJoin, and Cut-Through. The Confidential Transactions protocol, which is also used in other privacy coins such as Monero, hides the value of a transaction on Mimblewimble. The CoinJoin protocol combines payments from different senders into a single transaction. The Cut-Through protocol creates small blocks of transactions by aggregating multiple transactions into a single set for scalability.
Currently, Beam combines the Mimblewimble and Lelantus protocols at Layer 1, with transactions routed through Dandelion++ and merged at the stem phase at Layer 0 for ultimate privacy. Beam also uses the Proof-of-Work consensus algorithm. CUTcoin
CUTcoin is an open-source privacy-focused cryptocurrency project based on Monero, featuring the following functionality: