Jun 13, 2023 | Updated Jul 19, 2023
“Privacy coin” is a type of cryptocurrencies built on the principles of preserving privacy and enhancing data security. They are designed to conceal transactions and trader identities.What Is Privacy Coin?
Privacy coin, also known as “anonymous coins” or “private coins”, conceal the details of cryptocurrency transactions, such as account balance and amount transacted, and the parties’ identities. This makes it challenging to associate an individual with a transaction.
When users make regular crypto transactions, the transactions are not completely private. For instance, every Bitcoin transaction is traceable to the previous transactions. When private coins are used in a transaction, the identities and personal details of the participants are hidden. In addition, the transaction remains untraceable since the transaction details cannot be tracked by third parties.
Privacy coins were created to:
- Safeguard individuals’ privacy rights in the context of decentralized transactions or other decentralized services.
- Digitize cash while inheriting blockchain technology perks and functions of cash-in-hand (cash-in-hand is untraceable unless deposited in a bank).
- Advocate for fungibility, which means that coins retain their value or trait regardless of their history.
However, these coins have also raised concerns among regulatory bodies and law enforcement agencies worldwide. Privacy coins face regulatory pressure due to concerns over their potential for facilitating money laundering and illicit activities.
How Do Privacy Coins work?
Every privacy coin uses a different technique to anonymize its users and transaction details. Most of these methods include using temporary addresses and breaking down every transaction into multiple smaller standard denominations. Details about the complete or partial transaction may also be stored in encrypted form rather than made publicly readable.
Some of these techniques include stealth addresses, Zk-SNARKs, and ring signatures.
- Stealth addresses: A temporary address is generated for every transaction. It ensures that the transaction’s destination is only known by the sender and receiver.
- Zk-SNARKs: Zk-SNARKs enable an individual to prove the validity of a transaction while keeping the transaction details – like the sender, receiver, and amount – private.
- Ring Signatures: A technique for masking the source and destination of transactions by mixing the identity of the involved parties with decoy identities. In a ring signature scheme, a group of users can sign a transaction as if it was signed by one of them, to make it difficult to figure out the identity of the actual signer.
