Privacy Coin

Updated on February 26, 2024
Article byJyotsna Suthar
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Privacy Coin?

Privacy coin refers to the type of cryptocurrency that provides enhanced privacy features to the users and avoids any data leaks in transfers. Its sole purpose is to limit the sharing of transaction details between sender and receiver instead of making them publicly available.

Privacy Coin

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Privacy coin’s primary application or use case is within large organizations and corporations. This coin involves an additional layer of security to the network’s protocol. Consequently, firms can only make transfers if they reveal their identity. However, several limitations led to the privacy coin ban in many regions.

Key Takeaways

  • A privacy coin promises to provide advanced and enhanced privacy during fund transfers. As a result, the user’s identity remains invisible to third parties.
  • The main characteristics of the coin include stealth addresses, ring signatures, coin mixing, masking, and zk-snarks.
  • The majority type of this coin works on a zero-knowledge proof system that avoids any data leaks or transaction details during the process.
  • It includes Monera, Zcash, Dash, Decred, Verge, Oasis Network, Horizen, and others. In total, there are 100 coins in the crypto market.

Privacy Coin Explained

A privacy coin is akin to other cryptocurrencies. However, it adds an extra layer of anonymity and security to the system. In short, it provides more privacy features to the network participants. So, when a transaction occurs, the details of the sender or receiver are not published publicly. Instead, a hybrid mechanism ensures quicker transactions with reduced traceability. The top privacy coin examples include Monero, Dash, Zcash, and Verge.

The infrastructure or algorithm of the privacy coin involves components varying from Bitcoin.

It consists of the following features: stealth address, zk-snark, ring signatures, coin mixing, and others.

Let us look at them:

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#1 – Stealth Addresses

It allows the system to assign a one-time address to a particular transaction. Thus, it becomes difficult for hackers to track the sender.

#2 – Zk-snark

It is a zero-knowledge proof system where one must prove a transaction’s validity without revealing its details. As a result, details stay between the parties.

#3 – Ring signatures

Here, a group of users sign the transaction together, making it difficult to trace the original sender.

#4 – Masking

As the name suggests, the privacy coins mask the original transaction code with another.

#5 – CoinJoin

It mixes coins of various users and executes the transaction. Thus, anyone outside the trade cannot originate with the actual user.

Although there are various crypto tokens, the mechanism differs for all. For instance, most transactions on blockchain technology involve an online distributed ledger. As this ledger is public, the transactions executed get recorded on the network transparently. So, anyone who desires to access any detail can peep into the ledger. They are traceable plus trackable. However, most crypto enthusiasts and organizations opposed this feature.

Types

Let us look at the different types of privacy coins:

#1 – Monero (XMR)

Being the top privacy coin, it allows transactions to happen anonymously and securely. It works on the CryptoNight consensus mechanism that uses proof of work protocol to provide more advanced privacy and anonymity features. Through advanced cryptography, XMR enables a feature that makes it selectively transparent and fungible. Plus, they cannot be blocked by businesses as they are untraceable.

#2 – Dash Privacy Coin

The dash privacy coin is a two-tier network that enables fast and quick global payments. Here, the first tier incorporates proof of work protocol with at least 51% consensus for security. Likewise, the second tier includes master nodes (special verification nodes) that approve the blocks and reject any errors found. Plus, it uses the X11 hashing function to double-secure the network.

#3 – Zcash

It works on the zero-knowledge proof system that utilizes the zk-snark technology for verifying transactions. Here, the receiver must solve mathematical proof to access the transaction. Although it works on the Bitcoin codebase, it has a different mechanism for validation. It uses a proof-of-work SHA-256 hash function to secure the system’s network.

#4 – Oasis Network (ROSE)

The Oasis network enables privacy features that work on the proof of stake mechanism. Out of all, the primary use case is visible in Web3space via fraud proofs. It uses the TEE (Trusted Execution Environment) technology that involves a hypothetical black box. So, encrypted data enters the box, decrypts into smart contracts, and reaches the concerned person. Here, the chances of data leaks are invisible.

In addition to the previously mentioned privacy coins, several other notable cryptocurrencies prioritize enhanced privacy and security in their operations. Some of these include:

#5 – Decred

It works on a hybrid consensus mechanism that consists of proof of work and proof of stake protocol. As a result, scalability and privacy are secured at two levels.

#6 – Horizon

Horizon is another token in the privacy coin list that deploys a sidechain (Zendoo) to enhance privacy. It uses a similar zero-knowledge proof system with the Equihash consensus algorithm that tries to mask the transaction details.

#7 – Verge

Verge, a privacy-focused crypto token, applies the PoW mechanism like Bitcoin. It uses five mining algorithms to make it more secure and faster. Plus, it consists of stealth addresses to transfer funds without revealing data.

Examples

Let us look at some real-time examples of privacy coins that provide advantages to crypto users:

Example #1

Suppose ABC Ltd is a sizeable technology-based corporation in the United States. They have a diversified portfolio with all kinds of assets, including cryptos. So, whenever they made a transaction, it was primarily in fiat currency. But, the banking system could easily detect them. As a result, the firm shifted towards Bitcoin. However, the transactions were publicly visible to all the crypto participants. They did not want their million-worth transactions to be traced by their competitors. Hence, ABC Ltd moved towards Zcash, where transactions occurred without data leaks.

In the former case, although Bitcoin was a secured network, the privacy coin offered 2-layer anonymity.

Example #2

As of May 2023, crypto exchange Binance ceased to provide its platform for privacy coins like Monero, Dash, and Zcash in the European Union. Thus, users residing in France, Italy, Spain, and Poland may not trade these coins. And this move took place after the Markets in Crypto Assets (MiCA) regulation was announced.

Advantages And Disadvantages

Privacy coin comes with specific pros and cons depending on its use cases. So, let us look at them:

AdvantagesDisadvantages
It masks the identity of the users involved in a transaction. There are high transaction fees involved to maintain the privacy level. 
These coins enable financial security for large corporations. A privacy coin ban is implied in many regions like Japan and South Korea. In short, it is illegal in other parts of the world. 
It has different layers of privacy and anonymity created during the transfer. Through these coins, many illegal activities and fund transfers may occur. 
There is no public ledger, so third-party users cannot view the transaction details.
It provides financial freedom in regions with aggressive rules and regulations. 

Privacy Coin vs Cryptocurrency 

Although privacy coins are a subtype of cryptocurrency, they have different functions to perform. So, let us look at them:

BasisPrivacy CoinCryptocurrency
Meaning It is a type of cryptocurrency that provides enhanced privacy features on the existing blockchain. Cryptocurrency is a digital coin released on the blockchain network. 
Objective To avoid data leaks about transaction details to third-party users via a mechanism. To act like a token for making payments via a peer-to-peer system. 
Traceability  There are extra layers of security added to their network. Hence, traceability is not possible.As it consists of a transparent ledger, anyone can view the transactions. 
Total coins There are 100 coins operational in the market. According to sources, there are 22,904 cryptocurrencies available. 
Examples It includes Monera, Zcash, Decred, and others.Some are Bitcoin, Ethereum, Litecoin, Ripple, Polygon, Dogecoin, and others. 

Frequently Asked Questions (FAQs)

1. How to buy privacy coins?

Following are the steps for purchasing privacy coins from the crypto exchange:
– Choose any appropriate crypto exchange.
– Open an account and deposit fiat currency in the respective crypto wallet. 
– Select the coins from the list. 
– Make payment and confirm the order. 

2. Do privacy coins have a future?

The future of these coins depends on the existing privacy features and acceptance. With many countries imposing a ban, it may not seem easy to scale these coins and obtain global acceptance. However, if the privacy features are designed following the limitations imposed, these coins may excel in the digital space.

3. Are privacy coins risky?

The major risk associated with these coins is the regulatory factor. As privacy acts anonymously, it allows criminals to commit crimes like money laundering and fraudulent activities. Thus, the absence of regulatory bodies might hamper economic activities.

4. Do privacy coins have blockchain explorers?

There are no blockchain explorers available in these coins. As a result, no user can track or explore any interaction made by an address.

This article has been a guide to What Is A Privacy Coin. We explain its types, examples, advantages, disadvantages, and comparison with cryptocurrency. You may also find some useful articles here –

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