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Overview of anonymous cryptocurrencies

01.02.2021 Michael Golikov Michael Golikov

For many years, bitcoin has been accused of being used in illegal activities, financing terrorism, and tax evasion. Even the old fellow Bill Gates said that with the help of bitcoin, people buy drugs, and this leads to fatal outcomes. However, these accusations are absolutely groundless, for example, in 2019 (according to Chainalysis) the percentage of illegal transactions on the network did not exceed 0,08%, and the main transactions for the purchase of illegal substances occur using traditional fiat currencies.

There are many myths surrounding bitcoin, one of them being the anonymity of this cryptocurrency. Yes, you can get yourself a bitcoin wallet and create a new address in the blockchain completely anonymously, without providing personal data. But as soon as you start interacting with the outside world, receiving and sending transactions, there will be risks of revealing your identity. After all, at this point, it is already possible to link you to your wallet address. And then, because the blockchain is completely transparent, you can see the full history of your transactions.

Of course, a user can use different addresses to accept incoming payments. But when they make an outgoing payment and use outputs from different addresses in the same transaction, it will make it clear that all these addresses belong to the same owner.

And the easiest way to trace your identity and completed transactions is accomplished through cryptocurrency exchanges. The leading platforms are obliged to comply with the requirements of KYC and AML, which means that when you register, for example, on Binance and undergo identification, you can forget about anonymity. In many countries, exchanges are equal to financial institutions, and they are obliged to collect data about you (and give it to regulators when demanded).

It turns out that bitcoin, like most other cryptocurrencies, is not completely anonymous. But what should those users who want to keep their privacy and hide information about their actions do?

For this purpose, the developers have created a number of cryptocurrencies with the aim of full anonymity. The leaders in this area are Dash, Monero, and Zcash projects. Let's look at them in more detail.

Dash

Dash was created in 2014 by programmer Evan Duffield, who wanted to improve the algorithm of the first cryptocurrency. Evan initially proposed changes to the bitcoin code, but later created his own project called Dash with increased anonymity and transaction speed.

The Dash algorithm allows transactions to be carried out without specifying the addresses of the participants in the transaction. And with the help of masternodes, a mixing mechanism (PrivateSend) is provided. With each transaction, the user specifies the number of mixing rounds. Then masternodes, which were randomly selected, implement it. This guarantees the anonymity of the transaction because no one has full information about all the ins and outs of the transaction process.

Monero

Monero is an open-source cryptocurrency based on the CryptoNote protocol. The main task the developers faced was to provide increased anonymity of transactions. This currency is not an independent development but was launched in 2014 as a fork of Bytecoin (BCN) by the decision of the community.

Monero uses the CryptoNote protocol, which provides increased anonymity of transactions. CryptoNote works on the principle of a ring signature: a group of users is formed randomly in the network, where each participant receives two keys, a secret one and a public one. Each participant in the transaction provides the public key (used as a digital signature for the group) and the secret key that only they know. The Monero system constantly shuffles transactions and creates one-time addresses for each operation. Thus, it is impossible to determine which addresses were involved in the transaction and what specific amount was transferred.

Zcash

The cryptocurrency Zcash was created in January 2016 by the American company Zerocoin Electric Coin Company. The main goal of the developers was to ensure the anonymity of transactions. Once, Edward Snowden himself called this project the most interesting alternative to the first cryptocurrency.

Zcash uses the Zero-knowledge proof protocol, which makes it possible to confirm a transaction in the blockchain without the need to disclose information about the sender, the recipient, and the sum of the transaction. To make a payment, the user only needs to enter an individual script. There can be two scripts, public and private.

When using a public script, the transaction data will be visible to other participants of the network, when using a private key, the transaction remains completely anonymous. In addition, all transaction data is deleted immediately after the transaction, this is designed to protect users from being able to track transactions. It should be noted that most transactions in the Zcash network are now open, the users are not in a hurry to use the possibility of anonymizing their transactions.

Prospects for anonymous cryptocurrencies

Regulators do not benefit from leaving this market in the shadows, and a number of measures have been taken in recent years to combat anonymous projects. The Financial Services Agency of Japan (FSA) has imposed a total ban on cryptocurrencies with a high degree of anonymity. The list includes Monero, Zcash, Dash, and Augur.

Major exchanges are not lagging behind regulators. In January 2021, Bittrex delisted Monero, Zcash, and Dash. The same cryptocurrencies were also banned on the ShapeShift platform. The companies attributed their decisions to possible problems with regulators.

But despite the pressure, the anonymous cryptocurrencies are in no hurry to give up and continue to be popular with users. The creators of Dash convince the market that their cryptocurrency was created not for anonymity, but for payments. And at the moment, most of the transactions in this network are open, but users are taking their time to activate the possibility of anonymity.

As for Monero, at the end of 2020, it was added to the list of available payment methods on PornHub. And in February, fans of this coin offered to add Monero as a payment method on the Tesla website.

“There is no system in the world that cannot be hacked,”

reads one of the main tenets of IT security. And while anonymous cryptocurrencies do offer a high level of transaction privacy, government agencies and a number of private companies are developing tools to track transactions in the Monero, Zcash, and DASH networks.