Motivation behind privacy coins: making public blockchains more private and restoring the right to privacy
Privacy coins are insofar essential because they are solving a problem blockchain has created. Blockchain, being a public infrastructure, allows anybody to see everybody’s transactions. This means that in regards to payments, everybody knows everybody’s financial transaction, i.e. everybody knows who sent what to whom. Knowing that this also implies that government and government-related entities can see one’s transactions with little effort might derail people from using blockchain-based payment systems.
Another way to argue in favor of privacy coins is through the lens of financial privacy as human right. Based on that, one could argue that governments and companies who have access to people’s financial transactions are in violation of that human right.
Whatever the motivation behind building privacy coins, there are actually two types of them. Furthermore, within those two types a host of other differentiators exits.
Privacy coins vs. coins with privacy as a feature
Privacy coins and coins with privacy as feature refer to coins that obscure blockchain transactions in order to achieve anonymity.
Privacy coins are coins whose main goal is privacy (e.g. Monero). Coins with privacy as a feature implement privacy as one of their many features (e.g. Dash). For instance, Monero has privacy per default and the developers focus primarily on privacy (and security). Dash, in contrast, aims to be, among other things, fast and private. For transactions to be private with Dash one has to use their feature called PrivateSend.
Scope of anonymity
A similar differentiation is scope of anonymity, i.e. what do privacy coins and coins with privacy as a feature obscure. It goes from anonymization of only the senders’ IP addresses (e.g. Verge) to fully obscurity (anonymization of sender, receiver, and amount) with privacy coins such as Monero.
Depth of technical integration
Another technological difference between privacy coins and coins with privacy as a feature, is how deeply privacy is integrated into the coin’s code. Verge, for instance, only implements their privacy protecting technology (TOR and I2P). Monero, and many other privacy coins are developing their privacy protecting technology (ring signatures, ring confidential transactions, and stealth addresses) themselves. Admittedly, Monero’s privacy tech is based on the CryptoNote protocol, but the integration and adaption still goes very deep into Monero’s code.
Different type of privacy technology
Privacy coins and coins with privacy features also differ in regards to the privacy technology they use. The following non-exhaustive list contains some of the privacy technologies, tools and process used by privacy coins and coins with privacy as a features:
- ring signatures
- ring confidential transactions
- stealth addresses
- I2P (e.g. Verge)
- coin-mixing (e. g. Dash)
- zk-SNARK proofs: a zero-knowledge proof construction used by Zcash
- one-time public keys (e.g. Bytecoin)
Privacy with or without a choice
Moreover, privacy coins and coins with privacy as feature differ in how the implement privacy from a end-user perspective, specifically if privacy is an option or not. With Zcash, Dash, or Verge, users can choose whether they want to send a private or transparent transaction.
In contrast, Monero believes in privacy without choice; with Monero it is impossible to send a transparent transaction.
Monero believes in privacy without choice; with Monero it is impossible to send a transparent transaction
Side note: Although “privacy without choice” instead of “transparency without choice“ sounds weird because it is a very atypical state, it gives the whole discussion around public blockchain and private coins, a very intriguing spin.
Mining algorithm and ASIC-resistance
The final technical differentiation is mining algorithm and ASIC-resistance.
Most privacy coins and coins with privacy as a feature are Proof-of-Work (PoW). PIVX is one of the few with Proof-of-Stake, and Decred (whose privacy features are not yet available) uses a hybrid of PoW and Proof-of-Stake (PoS).
Additionally, ASIC-resistance is another differentiating factor. Most interestingly in this context is Monero. Monero’s hard-fork in early April 2018 made it ASIC resistance and as a consequence probably made mining hardware producers such as Bitmain unhappy. Besides such ecosystem issues, ASIC-resistance and mining algorithm are important because they can influence how centralized privacy coins and coins with privacy as feature become on the mining side leaving projects open to potential 51% attacks, censorship or concentration of power.