Bitcoin is an anonymous currency, but it's not entirely private. Every Bitcoin transaction is recorded on the blockchain and can be traced back to its source. That's why some people turn to privacy coins—cryptocurrencies explicitly designed to enhance anonymity.
The privacy coin market is increasing and attracting much attention. But what are these coins, how do they work, and why are they so popular?
The rise of privacy coins can be attributed to the growing concerns around government surveillance. These digital currencies were initially designed to provide anonymity and security for users who wanted to protect their identities, locations, and spending habits.
In this article, we'll talk about why privacy coins are growing in popularity, how they work, and what they mean for Bitcoin users who want to keep their transactions private.
What Are Privacy Coins?
There are instances when a cryptocurrency user might want features more common in fiat currencies like the U.S. dollar. Cash is notoriously difficult to trace, even if you know the serial numbers of the bills used in a transaction. This anonymity may be achieved to some extent by employing a privacy coin in settings where it is desired or even essential.
Privacy coins function similarly to other cryptocurrencies in most other regards. Owners of digital currencies can keep them in cryptocurrency wallets, and the public blockchain network verifies and records all transactions.
However, privacy coins encrypt the transactions and the identity of the wallet holders with additional levels of protection. It is trivial to trace the flow of a standard cryptocurrency like Bitcoin or Ethereum from one digital wallet to another. The total amounts of Bitcoin and Ethereum held by these wallets are also public information. However, privacy coins use a variety of hand sleights to conceal that information.
How Do Privacy Coins Operate?
Transactions involving cryptocurrencies that use public blockchains will always be visible, including details like who sent and received funds. Zcash and Monero, the two most popular privacy cryptocurrencies, use distinct techniques to conceal this data.
Transactions made with Zcash are both anonymous and completely public. A t-address, which behaves like any other public Bitcoin address, or a z-address, which masks the vendor's identity, is available to users. Using zero-knowledge proofs, these z-addresses verify that a transaction occurred between a buyer and a seller without disclosing any other information about the exchange. You can tell that a transaction occurred between two z-addresses at a particular moment on the blockchain, but you won't know who transacted or how much money changed hands.
A combination of Monero's characteristics makes it challenging to determine the origin of any transaction recorded in the cryptocurrency's blockchain. The first step is that Monero employs stealth addresses, sometimes called one-time public keys, to conceal the identities of the two accounts involved in a Monero transaction from anybody monitoring the blockchain. Meanwhile, ring signatures are used in Monero to further obscure sender identities by interleaving them with those of dummy recipients.
What Privacy Coins Mean for Bitcoin Users Who Want to Keep Their Transactions Private?
The rise of privacy coins is good news for Bitcoin users who want to keep their transactions private.
Privacy coins are an alternative to Bitcoin that allow users to transact entirely anonymously without leaving a trace of their identity.
The rise of privacy coins has led some people to wonder if this is a sign that Bitcoin is losing its edge as a digital currency that can be used anonymously. However, it's important to note that Bitcoin has never offered complete anonymity for its users—it simply provides a way for people to transact online without an intermediary party knowing precisely who they are.
While some privacy coins may offer more anonymity than Bitcoin, they don't deliver the same benefits as Bitcoin, such as being able to transact internationally without incurring high fees or having access to thousands of merchants worldwide who accept it as payment.
