Privacy coins provide a discreet alternative to Bitcoin and other popular cryptocurrencies. By hiding the details of your transactions, they ensure that nobody can see how much crypto you’ve transacted – or, at least, that nobody can see where you’ve sent your crypto.
The end result is that, when all goes according to plan, your crypto transactions can’t be tracked or analyzed.
Who cares? Well… lots of people. Obviously some of them are probably bad guys, and some are trying to evade taxes. The world is not a perfect place, and people will always game the system, whether with crypto or cash.
But most people who use privacy coins have much more serious reasons. Political dissidence is one – when transactions can be tracked, users’ behavior can be monitored. Free speech may seem to be a human right, but not every government agrees. Eric Wall of the Human Rights Foundation has written a series on privacy coins and their defense against authoritarianism in a surveillance society.
But companies like Chainalysis can track down many assets, which some people feel is an invasion of their right to transact anonymously.
However, you don’t need a full privacy coin to protect your transaction history: several cryptocurrencies have optional features for limited privacy. Usually, this comes with a trade off: mandatory features may provide better resistance against tracking, but optional privacy features allow for faster and lighter transactions.
Here’s how some leading cryptocurrencies approach the issue of optional privacy:
Monero Provides Mandatory Privacy, For the Most Part
Mandatory privacy is Monero’s selling point. Every Monero transaction is private, although you can share your view key if you really want to share your transaction with the world.
Riccardo Spagni, one of Monero’s lead developers, has argued the benefits of this approach: he says that “Monero’s edge will always be mandatory opt-out privacy [sic]” because it gives Monero a large anonymity set. In other words, you’ll have to make a special effort to opt out of privacy features.
Their privacy scheme conceals transaction amounts and destinations via transaction mixing (RingCTs) and stealth addresses. Stealth addresses have always been mandatory, but RingCTs have only been mandatory since 2017. This timeline may have introduced some minor tracing possibilities, as discussed here.
Zcash Offers Optional Privacy, But Default Privacy Is On the Way
Zcash’s Zooko Wilcox has suggested that Zcash will have “default on, ubiquitous privacy” in the future. Similarly, the Zcash Foundation has considered making shielding mandatory—but this isn’t happening quickly. In either case, some jurisdictions may have an issue with Zcash because of its privacy features – Coinbase in the UK just removed the ZEC token from their listings, for example.
Zcash’s shielded addresses allow transaction data to be hidden, including addresses, amounts, and memos. Shielded addresses can also interact with transparent addresses, and the particular data that any given transaction reveals depends on which addresses are involved. Some studies have suggested that this optional approach leaves Zcash open to analysis, as explained here.
Dash Offers Optional Mixing Features via PrivateSend
Dash offers an optional feature called PrivateSend, which is essentially a transaction mixer. It’s hard to say how many people use PrivateSend on the whole, but MyDashWallet’s statistics suggest that 12% of its transactions have gone through PrivateSend. It seems unlikely that Dash will ever make PrivateSend mandatory, given that it incurs extra fees and raises regulatory questions.
In practice, PrivateSend works in a fairly simple way: it mixes transactions to prevent those transactions from being traced. There is significant debate over whether PrivateSend transactions are actually untraceable, but the team itself hasn’t commented.
Furthermore, it seems that mandatory privacy isn’t the best way of resisting this, as traceability depends on the number of PrivateSend inputs.
Bitcoin Offers Optional Coin Mixing Through CoinJoin
Bitcoin offers CoinJoin as an optional privacy feature. Similar to Dash’s PrivateSend feature, CoinJoin doesn’t hide transaction data – it simply mixes transactions. CoinJoin is also fairly traceable: tools like CoinJoinSudoku allow at least some transactions to be traced, although it’s not clear how many CoinJoin transactions are actually vulnerable to analysis.
CoinJoin is the least mandatory privacy option we’ve looked at yet. Not only is it an optional feature, it’s not even an option in many Bitcoin wallets. As such, CoinJoin isn’t widely used: right now, only about 4% of Bitcoin transactions use CoinJoin. However, the actual number of transactions that benefit from it may be slightly higher, as CoinJoin has several derivatives.
Mimblewimble Does Things Differently
Mimblewimble is a relatively new privacy protocol, and it can be integrated with different coins. It doesn’t explicitly provide mandatory privacy, but Grin and Beam, the first Mimblewimble coins, are fully private. However, since Mimblewimble can also be integrated with existing coins, it could be implemented as an optional feature – though no major coins have done so yet.
Mimblewimble’s approach to privacy is unique: it doesn’t use traditional crypto addresses at all. That means Mimblewimble-based coins provide very little data that can be analyzed or traced.
Litecoin Will Offer Optional Privacy, At Least At First
Litecoin isn’t a privacy coin, but it is planning to add confidential transactions in the future. Litecoin creator Charlie Lee has stated that confidential transactions will be optional at first, but he has also said that he is in favor of a mandatory approach to privacy: “I think mandatory is much stronger privacy and fungibility but it’s harder to reach consensus on doing,” Lee stated in January.
It’s not clear what Litecoin’s privacy features will include, apart from the fact that Mimblewimble will be involved. Recent statements from Lee suggest that Litecoin’s privacy features are progressing quite slowly. For now, Litecoin is just as traceable as Bitcoin.
Incidentally, Litecoin has just been hit by a dusting attack, which could be used to trace transactions.
Will Privacy Coins Move Toward Mandatory Privacy?
The virtues of mandatory privacy and optional privacy are often debated, but the full implications are largely unproven. Naturally, most developers are concerned with more technical matters. Still, this hasn’t stopped projects from taking a stance: some projects value the benefits that come with mandatory privacy, while others value the efficiency and flexibility of optional privacy.
That said, privacy coins might begin to move toward mandatory privacy as their privacy schemes become more streamlined, lightweight, and efficient. It’s also possible that a serious threat against non-mandatory privacy schemes could speed up the transition.
In the meantime, mandatory and optional privacy will continue to be a talking point for cryptocurrency advocates throughout the space… and a potential sticking point for regulators.