Privacy Coin Comparisons
With government regulation on the horizon and a shift in focus towards the public’s yearning for control over their privacy, privacy coins have become an attractive sub- asset class within the cryptoasset space for those who are looking to exercise their rights to privacy and anonymity. We are going to take a look at the top privacy coins in the market, how they compare to each other, and how each coin performs at enhancing the privacy and anonymity of the coin holder.
What is a Privacy Coin?
Privacy coins have some similarities to the most widely used/known cryptoasset, Bitcoin. Bitcoin is a decentralized, public ledger where transactions sent through the blockchain are semi-anonymous. Every Bitcoin transaction, including amount, sender wallet address, and recipient wallet address, is broadcast to the public ledger for all to see, however the owner of each wallet is unknown. Unfortunately, it is becoming easier to link a wallet address to its owner’s identity. Like Bitcoin, privacy coins still utilize a public ledger for transactions. Where they differ is that privacy coins employ various means to obfuscate the path of each transaction. Each privacy coin implements different technology to accomplish the same goal of preventing the tracking of wallet address activity. Here we will discuss the top privacy coins in the space; assessing each coin based on the following features:
What are the specifics behind each coin’s privacy technology? Each coin employs different means of keeping the amounts, addresses, and transactions private on its blockchain.
Monero: Monero is the only “privacy by default” cryptoasset in the space in that it there is no ability to choose to have transparency within the blockchain. Monero protects privacy and provides an opaque blockchain through its use of stealth addresses and RingCT or Ring Confidential Transactions.
Through stealth addresses, a receiving wallet is able to receive multiple payments through their single wallet while ensuring there is no connection on the blockchain between their address and another wallet address. Stealth addresses accomplish this by assigning a random one-time address for each transaction made by the sender. All transactions are routed to these unique addresses before ending up in the receiving wallet therefore masking the recipient and any transaction history for that receiving wallet.
Additionally, Ring CT is utilized to verify the amount of each transaction without having to reveal any of the actual details of the transaction. Before RingCT was implemented, ring signatures were used to hide the sender of a transaction amongst a number of decoy transactions within a “ring” where the actual transaction amounts were compiled with a number of decoy transactions of the same amounts. The problem was that while the sender (and receiver through a stealth address) were hidden, the amounts being transferred were visible to the public. RingCT built upon ring signatures where inputs and outputs are now cryptographically hidden so outside observers are not able to view the specific amounts but are able to be confirmed on the blockchain through commitments from the sender to commit the same amount of Monero input that is required for the output. So through the use of stealth addresses and RingCT the sender, receiver, and transaction amounts are all kept private on the blockchain.
ZCash: ZCash uses what is called “zn-SNARKs” (zero-knowledge Succinct Non- Interactive Argument of Knowledge) for its privacy method. Without getting too technical, zn-SNARKs allows for a sender to prove that the information they are sending to the receiver is true without having to provide any information other than the fact that the information is true. Miners are able to verify transactions through zn-SNARKs without knowing who sent or received the coins based on each party proving that a certain statement is true without ever revealing any precise details. Zn-SNARKs is potentially one of the most private and easy to use tech within the privacy coin space.
The major problem with the privacy of ZCash (and with many other “privacy” coins), however, is the coins handling of privacy. Unlike Monero, ZCash offers the choice of optional privacy where senders can choose to make the transaction private or transparent. The issue with this is that the majority of ZCash transactions are currently not using the optional privacy. The use of zn- SNARKS is more costly and slow than transparent transactions, so most senders are choosing the former to send payments. On top of that, since most are transparent, the private transactions stand out on the blockchain making it easier for bad actors to isolate those using the privacy feature making them more susceptible to an attack.
Verge: Verge offers optional privacy similar to ZCash. However, Verge is not cryptographically private like ZCash and its zn-SNARKs. How Verge offers privacy is through TOR, an IP service, and I2P (Invisible Internet Project) which essentially hides IP addresses enabling anonymous communication across the network. Essentially this approach is that of a more sophisticated VPN. However, all of the transactions from wallet addresses to amounts are still transparent on the blockchain. Through TOR and I2P these transactions are just not connected to any IP addresses.
Dash: Dash is a completely transparent fork of Bitcoin which uses CoinJoin to provide a level of optional privacy. Through CoinJoin senders can pay an additional fee to mix their coins with other coins through a masternode before being send out to the receiving address. Unfortunately, that is the extent of Dash’s “privacy”. The sending address, receiving address, amounts, etc are all transparent.
ZCoin: ZCoin utilizes the Zerocoin protocol for its privacy. Zerocoin completely breaks the transaction links between coins through the use of zero knowledge proofs. How this is accomplished is by allowing you to burn coins up and then later redeem an equivalent number of brand new coins with no prior transaction history. After any transaction, coins appear as completely brand new coins compared to being obscured like other privacy coins. To perform all of this ZCoin requires a trusted setup, additional storage on the blockchain due to large proof sizes, and additional computational resources to verify transactions. However, ZCoin is working to remove the trusted setup and reduce the proof sizes through the use of Sigma protocol. Their roadmap shows this to be completed in 2018.
PIVX: PIVX, much like ZCoin, utilizes Zerocoin protocol where coins are burned and re-minted during every transaction. This provides the receiver of the coins with “new” coins that have zero transaction history.
Fungibility is an asset’s interchangeability with other assets of the same type. Interchangeability assumes everyone values all assets of the same class the same. For cryptoassets, this means that every unit of a specific coin is worth the same value and thus can be substituted for another unit of that same coin. No coin risks potential blacklisting or depreciation due to its possible use within an illegal or fraudulent transaction.
Monero: Through the use of RingCT, Monero transactions are completely private and untraceable and therefore truly fungible in nature. There would be no telling if one specific coin is more preferred over another due to illegal or fraudulent activity.
ZCash: Since most transactions on ZCash are not currently being used with the privacy feature enabled, zcash is not fully fungible. Yes, when a coin is used within an encrypted transaction it you lose the ability to track it back to its beginnings, however with only a small amount of transactions using the privacy feature it is possible for the majority of private transactions to be traced. The entire transaction history of ZCash (or at least a larger majority of transactions) would need to be private for complete fungibility so without a higher percentage implementation of zn-SNARKs privacy feature ZCash falls short in this feature.
Verge: Verge, much like ZCash falls short of being fungible due to its optional privacy feature. Also, just masking the IP addresses does not make the transactions untraceable or private on the blockchain. Every transaction, besides the IP addresses, are transparent and therefore have traceability back to their origins. Therefore, Verge is not fungible.
Dash: Since Dash’s blockchain is fully transparent and the use of CoinJoin’s mixing is optional, Dash coins and addresses could potentially be blacklisted. Therefore, Dash is also not fungible.
ZCoin: Through Zerocoins “burn and mint” strategy, ZCoin provides complete fungibility since all coins used within transactions are burned and re-minted. There is no transaction history for all new coins so no one coin would be preferred over another.
PIVX: Through Zerocoins “burn and mint” strategy, PIVX also provides complete fungibility since all coins used within transactions are burned and re-minted. There is no transaction history for all new coins so no one coin would be preferred over another.
Having a decentralized blockchain means there is no reliance on one entity. All nodes have equal power and control; there are no masternodes that have more influence over other nodes. The cryptoasset is not created, maintained, or represented by any one central authority.
Monero: While Riccardo Spagni (better known as FluffyPony) is the face of Monero, the project is truly decentralized and open to public development and discussion. Monero’s source code is open and can be found on GitHub and the community involvement is transparent as well. The project does have central core developers (led by FluffyPony) that help merge different development contributions while the entire community can audit and scrutinize any action of contributors.
ZCash: ZCash is currently run by a US-based company, Zerocoin Elecrtic Coin Company. The development and implementation of the protocol is dependent on this single company. On top of that, the company takes a “founders reward” consisting of 20% of all coins mined for the first 4 years. While there are a number of different mining pools currently mining ZCash, the large founders reward provided to the centralized company at the head of ZCash makes this project a relatively centralized coin.
Verge: Verge is an entirely open-sourced and community-led project. There is no centralized team or entity managing or developing the project.
Dash: As a Bitcoin fork, Dash is inherently decentralized. However, their use of masternodes provides a reasonable amount of centralization. Through masternodes, some users have more power and influence over the rest of the community.
ZCoin: Zcoin does have a founder and a centralized team. However, the development of the project is open-sourced on Github.
PIVX: PIVX is a fully open-sourced project. Its use of masternodes, similar to Dash, also provides a reasonable amount of centralization. However, where Dash uses Proof of work, PIVX utilizes proof of stake for distributed consensus.
In our opinion, Monero is the clear choice amongst the privacy coins if you are looking for something that is fully private, fungible, and decentralized. All of the other coins have some aspect that falls short of what Monero offers and can potentially put your privacy and security at risk. One thing to note however is that due to Monero’s comprehensive privacy protocol there is a real possibility of governments looking to find a way to crack down on the coin. Its potential for use within illegal activity has attracted significant attention from the likes of the U.S. Government so hedging your bet in this space with a pseudo-private alternative such as ZCash, Zcoin, or PIVX could be a good long-term strategy within the privacy sub-asset class. Privacy coins have been a hot topic to start 2018 and we see them being major players in the ecosystem going forward. As always, we preach that everyone should conduct their own due diligence whenever they invest in an cryptoasset.