Exploring Private Cryptocurrencies

An Essential Guide for Beginners
According to CoinMarketCap, there are over 26,000 tokens and cryptocurrencies today. These digital assets offer different functionalities and are designed for different purposes, from serving as a medium of exchange and storing value to enabling decentralized applications and smart contracts.

Despite their diversity, most cryptocurrencies fall into several categories, such as Layer 1 or coins with their own blockchain, smart contract platforms, stablecoins, decentralized finance (DeFi) tokens, non-fungible tokens (NFTs), and others. Some coins and tokens may fall into more than one category.

A relatively large and rapidly evolving group of cryptocurrencies are privacy coins. With their emphasis on enhanced privacy and confidentiality, these digital assets aim to solve one of the key challenges of modern digital finance: preserving users' privacy.

What are privacy coins?

Private crypto coins, also known as privacy coins, are a type of cryptocurrency that emphasizes privacy in transactions. These coins are designed to keep the identities of the parties involved and the amount of transferred funds in a transaction confidential, making it difficult or impossible to trace the transaction on the blockchain.

The idea of private crypto coins arose in response to concerns about the lack of privacy in Bitcoin and other early cryptocurrencies. Bitcoin, for example, is not truly private because all transactions are recorded on a public ledger that anyone can view. While Bitcoin wallet addresses are pseudonymous, it is still possible to track transactions and link them to specific individuals or entities through sophisticated data analysis techniques.

For this reason, organizations and individuals that deal with sensitive information, such as commercial contracts or personal data, prefer privacy-centric blockchains. These cryptocurrencies are still public because they have public, open ledgers, but transaction information is obfuscated to varying degrees to protect end-user privacy.

The first private cryptocurrency to gain significant traction was Monero, which was launched in 2014. It uses a technology called "ring signatures," which mixes the sender's transaction with others to make it harder to identify the sender. It also uses stealth addresses, which make it difficult to trace the recipient of a transaction.

Since the launch of Monero, a number of other privacy coins have emerged, including Zcash, Dash, Verge, and CUTcoin. Each of these coins takes a slightly different approach to privacy, but they all share the goal of making transactions more confidential.

Key features of privacy coins
For cryptocurrencies to be truly private, they must meet the following conditions:
  1. Anonymity: the inability to associate a user's identity or IP address with transactions and wallets
  2. Untraceability: the inability to trace the history of money movements (we can't check if two transfers were made from the same wallet)
  3. Unlinkability: the inability to confirm that two transfers were made to the same wallet.
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

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 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 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 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 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 is an open-source privacy-focused cryptocurrency project based on Monero, featuring the following functionality:
  • Use of the more modern and much less resource-intensive Proof-of-Stake consensus algorithm instead of Proof-of-Work (used by mainstream privacy coins)

  • Extended functionality that allows users to create different types of tokens whose transactions are as private as those of the underlying coin.

  • Decentralized private liquidity pools that provide popular exchange and farming mechanisms (private DEX)
These features, along with the robust, proven codebase inherited from Monero, make it a unique product in its own right, combining the benefits of the Cryptonote family of coins with many essential features of smart contract platforms.