Privacy-Oriented Cryptocurrencies

There’s still a common misconception that all cryptocurrencies allow their users to remain anonymous, but this isn’t true. In fact, traditional cryptocurrencies like Bitcoin have completely transparent databases — anyone can trace the entire history of any crypto unit, no matter how small, including all its transactions. Additionally, there are various methods that can link a specific person to a cryptocurrency address.

However, there’s a demand for privacy from users. This is clearly demonstrated by the total market capitalization of privacy-oriented cryptocurrencies, which, as of the end of August 2024, was nearly $6.25 billion, according to CoinGecko, with more than 80 projects in this segment. So, what are privacy-oriented cryptocurrencies, and what are their origins and features? Let’s explore this topic.

Cryptocurrency Anonymity: Origins and Misconceptions

The concept of cryptocurrencies originally emerged from the cypherpunk community, an informal group of activists, programmers, and cryptographers who believed that privacy and data protection are of paramount importance in the digital age.

Anonymous, decentralized digital payment tools were envisioned as a way to ensure personal freedom and protect citizens from government and corporate control. David Chaum was at the forefront of this movement. In 1981, he published a paper titled “Untraceable Electronic Mail, Return Addresses, and Digital Pseudonyms,” in which he outlined the principles of an anonymous payment system based on cryptography, laying the groundwork for the modern crypto industry.

Bitcoin, the first cryptocurrency in the modern sense, has a fully transparent blockchain network. As Bitcoin’s connections with the traditional financial system and the global digital information space strengthened, it became clear that specialists could easily de-anonymize almost any crypto user. This could happen in various ways, such as:

• the user links a cryptocurrency address to a bank card when buying or selling a digital asset;
• the user undergoes KYC on a trading platform linked to their cryptocurrency address;
• the user shares their public key in a forum post or even in a personal email, allowing identification through traffic analysis, metadata extraction, cache data retrieval, fingerprinting, and other techniques.

Despite this, the demand for privacy remained high, and by 2012, an anonymous developer or group of developers under the pseudonym Nicolas van Saberhagen developed the CryptoNote protocol, which later led to the creation of an entire family of privacy-oriented cryptocurrencies. The technology was detailed in the “CryptoNote Whitepaper,” with the final version published in October 2013.

What Are Anonymous Cryptocurrencies? 

Anonymous or privacy-oriented cryptocurrencies are digital assets that utilize specialized technologies to conceal or obscure transaction details, making it difficult to trace them. 

These technological features enable the following:

• hiding or masking crypto addresses involved in transactions;
• encrypting transaction amounts, making them visible only to the parties involved;
• using transaction mixing methods to complicate the tracking of assets.

As a result, on-chain analysts are unable to trace cryptocurrency transactions, ensuring the anonymity of senders and recipients.

Privacy-Enhancing Crypto Technologies

One of the most widely used privacy-enhancing technologies today is Zero-Knowledge Proof (ZKP), which CP Media has covered in a dedicated article.

Other popular methods for anonymizing cryptocurrency transactions include:

• zk-SNARK and zk-STARK cryptographic technologies. Based on ZKP, these methods hide transaction details like amounts and addresses of senders and recipients, while still allowing the entire network to verify the transaction’s validity and adherence to protocol rules.
• Confidential transactions (CT). Also based on ZKP, this method hides transaction amounts, storing them in an encrypted form.
• Stealth addresses. This technology generates one-time addresses for each new transaction, making it impossible to link multiple transactions to a single public address.
• Ring signatures. This method conceals the initiators of specific transactions using a ring structure of signatures.
• CoinJoin transaction mixing. CoinJoin combines several transactions from different users into one large transaction, then redistributes the assets, making it difficult to trace the origin of funds.
• MimbleWimble protocol. This protocol prevents linking individual transactions to specific addresses by hiding transaction amounts and the involved addresses.
• Dandelion++ transaction routing. This method complicates determining the original IP address from which a transaction was sent by using several intermediary nodes.
• CryptoNote protocol. As previously mentioned, this protocol uses ring signatures and stealth addresses to ensure transaction anonymity.

Other, less common privacy-enhancing technologies exist as well, as this field continues to evolve rapidly. Besides, some projects and users employ other methods for anonymization, such as TOR (The Onion Router) and I2P (Invisible Internet Project). These technologies ensure anonymity and privacy in network interactions by hiding users’ IP addresses and making them difficult to trace. In the context of cryptocurrencies, they’re used to connect to networks anonymously and conduct transactions securely.

Most Popular Privacy-Oriented Cryptocurrencies

Three of the most prominent projects in the sphere of privacy cryptocurrencies are:

1. Monero (XMR). This project utilizes ring signatures, stealth addresses, and ring confidential transactions (RingCT) to ensure transaction anonymity.
2. Zcash (ZEC). The project’s blockchain employs zk-SNARK technology to anonymize transactions.
3. Dash (DASH). This cryptocurrency uses the PrivateSend function, based on the CoinJoin method, to mix transactions and make them harder to trace.

In addition to these, there are other, less popular cryptocurrencies that also allow users to maintain anonymity. Among them are:

• Beam (BEAM) and Grin (GRIN). These projects operate on the MimbleWimble protocol.
• Verge (XVG). This cryptocurrency enables the use of TOR and I2P technologies to anonymize users’ IP addresses and offers the Wraith Protocol to choose between public and private transactions.
• Oasis Network (ROSE). This project applies confidential computing technology and trusted execution environments (TEE), such as Intel SGX, to allow fully encrypted data to be used even during smart contract processing.
• Beldex (BDX). This platform uses RingCT and stealth addresses to ensure anonymous transactions and is working on implementing a suite of privacy-enhancing solutions, including the Beldex Browser, BChat messenger, and the Beldex Privacy Protocol.

As mentioned earlier, there are more than 80 active crypto projects focused on privacy. What’s more, Zero-Knowledge (ZK) technologies are used in nearly 50 projects, many of which aren’t specifically branded as privacy-oriented but still provide users with various privacy features. Lists of such projects can be found on aggregators like CoinGecko and CoinMarketCap.

Legal, Practical, and Ethical Aspects of Using Privacy-Oriented Cryptocurrencies

From a legal perspective, the use of privacy-oriented digital assets is governed by the same regulations that apply to the broader cryptocurrency market. However, industry standards aren’t universally established; for instance, the United States still lacks legislation specifically aimed at regulating digital assets. This creates conditions for regulatory pressure on centralized trading platforms under the guise of anti-money laundering (AML) and countering the financing of terrorism (CFT). As a result, several major cryptocurrency exchanges have delisted privacy-oriented cryptocurrencies.

Some examples include:

• in April 2018, the Japan Virtual Currency Exchange Association (JVCEA) recommended that local exchanges stop dealing with Monero, Dash, and Zcash;
• in August 2019, Coinbase UK announced the cessation of Zcash trading;
• in September 2019, South Korean exchanges Upbit and Bithumb delisted Monero and Zcash;
• in June 2020, Binance UK removed Monero, Dash, and Zcash from its trading platform;
• in October 2020, Binance US delisted Zcash;
• in January 2021, Bittrex announced the delisting of Monero, Zcash, and Dash;
• in late January 2023, OKX delisted Monero, Zcash, and Dash.

These are just a few examples, with many more similar instances. However, trading of anonymous crypto continues on several major CEXs, including KuCoin, Gate.io, Kraken, and HTX. The market for privacy tokens is also thriving on decentralized exchanges. Furthermore, several DEXs and lending platforms based on Monero and Zcash are expected to launch in 2024. Technologies for atomic swaps, which allow fast and secure exchanges of anonymous cryptocurrencies for BTC, LTC, and other assets without intermediaries, are also rapidly developing. Examples are the Atomic Swap Protocol, Haven Protocol, THORChain, Komodo, Farcaster, and others.

As for ethical considerations, there’s no consensus on whether anonymous cryptocurrencies should exist. On the one hand, privacy-oriented cryptocurrencies can be used as intended by ordinary users who are dissatisfied with the pervasive control over the financial sector by governments in conjunction with large financial conglomerates. On the other hand, they can also be used for illicit purposes. It’s worth noting that the total market cap of anonymous cryptocurrencies is around $6.25 billion, while the illicit markets were estimated at a minimum of $1.6 trillion in 2017 according to the “Transnational Crime and the Developing World” report and has likely only grown since.

Accordingly, anonymous cryptocurrencies are highly likely to be financial tools for cypherpunks, market speculators, and possibly retail users of DarkNet platforms. At the same time, the development of this sector is driving advancements in privacy technologies, which are increasingly being applied beyond the crypto market: in various DLT platforms, CBDC projects, digital identity protocols, and others.