Cryptocurrencies burst onto the global financial scene over a decade ago and offer a decentralized and borderless economic alternative to traditional fiat currencies. Their humble beginnings were rooted in nerdy corners of the internet, but since then, they have expanded to become serious global financial alternatives that are pegged to the US dollar and are being much more widely adopted around the world.
When they first broke onto the scene, many falsely believed cryptocurrencies to be completely anonymous. And whilst these digital assets are much safer than more traditional electronic payment methods due to their increased anonymity on the blockchain, they are actually only pseudonymous. Indeed, every transaction that is made through crypto is publicly recorded on the blockchain, and should someone wants to, they could feasibly infer the identities of the transactions.
This realisation has become widespread, and with the adoption of more niche and varying cryptocurrencies continuing to burst onto the market to fit different needs, there was a gap in the market for the arrival of anonymous (privacy-focused) cryptocurrencies to edge their way into favor. These coins aim to protect identity and private details from prying eyes. But how do these anonymous crypto coins work?
The Difference Between Anonymity And Pseudonymity?
Understanding the difference between pseudonymity and anonymity is important when clarifying what is meant when it comes to discussing anonymous cryptocurrencies. A lot of big cryptocurrencies are pseudonymous. This means the likes of Bitcoin and Ethereum use addresses that are not actually tied to real people or real-world identities. However, despite this, the transactions that are made using these coins are all visible on the blockchain. This means if you can correctly tie an address to a person and link them through a website, a pattern of behavior, or an exchange, then you are likely to find that transactions can be traced by those who would want to do this.
In an effort to counter this, anonymous cryptocurrencies have been developed that are designed to conceal transaction details. This makes it much harder to link addresses to individuals and makes it practically impossible for anyone to identify the transaction. These coins are designed to protect both the sender and the receiver in the transaction, whilst also protecting the transaction amount.
Other industries, such as healthcare and retail businesses, have focused on merging this anonymity model with the use of cryptocurrencies. For retail platforms, this sees them looking to improve privacy during transactions, whilst in healthcare, the blockchain is often utilized alongside anonymity when data sharing is concerned. However, online casinos are perhaps the best example of an industry taking steps to enhance anonymity. Specifically, these platforms offer no KYC crypto casinos that combine the advantages of fast withdrawals and vast markets with the anonymity of cryptocurrencies.
The Technology Behind Anonymous Cryptocurrencies
These types of coins have only recently burst onto the scene, and they require advanced technology to be effective. Here are some of the technologies behind these coins:
- Zero-Knowledge Proofs
This technology is one of the most powerful ways in which crypto users who focus on privacy can bypass typical systems to get more anonymous. Zero-knowledge proof allows the statement to be proved true without the need to reveal any extra information. In layman’s terms, this means that cryptocurrencies using zero-knowledge proofs can prove that the sender has enough funds to make the transaction, that the transaction is lawful and legitimate, and that there has been no double-spending without revealing any data or information relating to the sender, receiver of the amount being transferred. These proofs are the ultimate incognito mode when it comes to anonymity when using cryptocurrencies, and are expected to grow 22.1% by 2033 in market share value.
- Ring Signatures
This is a cryptographic method that allows for transactions to be signed by one member of a group without requiring the identity of the singular person signing it. This means that when someone sends a transaction on the blockchain, their signature can be mixed with many other signatures in the group. This means that those observing the transactions could verify that someone within the group has allowed for this transaction to go ahead, but could not feasibly pinpoint the individual who has done so, effectively hiding the sender’s identity in a group setting. This is also effective at posing transactions as coming from multiple sources rather than a single individual.
- Confidential Transactions
This technology allows transactions to be completed without the amount being transferred being visible. In hiding the transaction amount, this technology allows the network to verify that no new coins were created, whilst the actual transaction value remains hidden from public view. This ensures that balances and payment amounts are hidden from the public without jeopardizing the integrity of the blockchain network.
- Stealth Addresses
These protect the identity of the receiver instead of acting on the sender during transactions. Instead of sending funds to a public address on the blockchain. Stealth addresses allow users of cryptocurrencies to send the receiver a one-time address using the receiver’s public information. Once sent to that address, only the receiver can detect and get access to the transaction amount to get their funds. This means that even if someone knows your public address on the blockchain, they cannot scan for incoming payments linked to you, as they are hidden using these stealth addresses, which can only be used one at a time.
Finally
Through the use of advanced technologies, anonymous cryptocurrencies hide transaction details without interrupting the safety and integrity of the blockchain. Using tools such as zero-knowledge proofs, ring signatures, confidential transactions, and stealth addresses, they nullify threats, protect sender and receiver identities, and hide transaction amounts.
In a digital age that promised full financial anonymity, these technologies are restoring faith in the crypto world that things can be private, not just pseudonymous. They are facing challenges and have a bit of a way to come to fully integrate this kind of technology into the wider crypto market, but with some time, there is no doubt they offer a serious contending option for the future of digital assets.
FAQ
Why Do People Want Privacy?
Whilst many will say that people using crypto coins wanting their tracks covered is due to illicit activity, there are plenty of reasons why those using crypto would want to cover their tracks when using it legitimately. Privacy is pivotal in the digital world when it comes to money and transactions. After all, your traditional bank balance remains private by default.
This is not the case for many cryptocurrencies, given that transaction records are on the blockchain. As such privacy privacy-focused individuals argue that anonymous cryptocurrencies are beneficial as they don’t expose financial history to the world, protect confidential trades between businesses and other personnel, as well as keep transactions private for those living in countries where domestic policies are stringent.
Which Cryptocurrencies Use These Technologies?
Two coins really stand out as the best when it comes to utilizing these anonymous technologies.
Monero (XMR) provides a service that makes use of ring signatures alongside stealth addresses and confidential transactions to hide sender and receiver information as well as to hide the amounts of transactions. This sort of privacy is offered to the user by default, which means right from the start, every transaction is private when using this coin.
Zcash (ZEC) makes use of zero-knowledge proofs. This allows the users to choose if they would like fully private transactions, where information is completely hidden. Whilst many of these settings are set up within the coins to function straight away, they can be turned off should the user choose to do so. By offering this kind of anonymity to users, these two coins are really setting themselves apart from the rest in a very saturated crypto market to define themselves as truly anonymous.
What Are The Drawbacks?
Whilst coins that use this privacy do offer advantages for users, there can be drawbacks for the coins. These complex technological additions do increase the difficulty when it comes to developing the coin further, which may limit subsequent scalability. Scalability is a growing focus for many exchanges and coins as they attempt to future-proof themselves. With reduced scalability, these coins may suffer from longer transaction speeds and slower verification on transactions made; however, this is a fair trade-off for those looking to remain hidden.
Equally, this sort of anonymity technology can make it hard to commence audits for those observing, bringing increased scrutiny from regulatory bodies and placing limitations on exchanges.
What Is The Future Of Anonymous Cryptos?
Whilst these technologies offer the user almost guaranteed anonymity, they do not offer absolute anonymity. This cannot be guaranteed under the current blockchain. However, with users continually seeking extra security and privacy technology growing, it would be a safe bet to assume this section of the industry will evolve rapidly in the years to come.
Experts and developers will be looking at creating better zero-knowledge proofs, along with attempting to integrate these existing privacy features into the more mainstream cryptocurrencies that exist. Equally, there continues to be a focus on bettering the protection against tracking on the network and unwanted presences in the blockchain.
