Many people think cryptos like Bitcoin and Ethereum may be a way to avoid taxation or conceal transactions, but that isn’t true. Thanks to their public blockchains, all BTC and ETH transactions can be viewed and analyzed by anyone on blockchain explorers like Etherscan or Blockstream.
However, there are cryptocurrencies specifically designed with privacy in mind – examples include Zcash, Monero, and Dash. These ‘privacy coins’ employ a variety of strategies to keep your identity and your transactions confidential.
Anonymity and Untraceability
As mentioned, privacy coins generally have two big features that make them different from other cryptos – anonymity and untraceability. These features are made possible by techniques such as Stealth Addresses, Ring Signatures, and Zero-Knowledge Protocols.
- Stealth Addresses require a sender to generate a new address for every transaction sent in order to avoid being linked to a receiver. Monero (XMR), one of the top privacy coins, uses a version of stealth address called the dual-key stealth address protocol (DKSAP).
- Here’s an explanation about Ring Signatures provided by cybersecurity firm LedgerOps:
“In a blockchain transaction, you sign a digital signature to verify that you’re the sender. If you’re the only person doing this signing, it’s not tough for someone to trace it back to you. Ring signatures combine you with other signers in a ring to hide you as the sender. The higher the number of additional parties in the ring, the harder it is for someone to connect you with the transaction. It’s like playing a game of blockchain Where’s Waldo”
- As explained by Decrypt, Zero Knowledge Proof is a method used in cryptography to prove that something is known without revealing the known information directly. It essentially allows private information to be kept secret in an exchange. Zero-knowledge proofs are indirect proofs allowing you to prove you know a secret without ever revealing the secret to anyone else.
Privacy Coins and AML
It must be said that privacy coins are increasingly in the crosshairs of global anti-money laundering (AML) regulators due to their ability to facilitate money laundering – and they have been delisted by many exchanges as a result.
The legality of privacy coins depends on individual jurisdictions and this content is by no means a recommendation to use privacy coins. Remember to consult your local regulations if you plan to trade or use privacy coins.
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