When Bitcoin was first created 9 years ago, its goal was to introduce the world to digital cash. However, another use case was discovered quite soon, which is the anonymous purchase of illegal goods online.
As it soon turned out, however, Bitcoin is not very anonymous. Despite the fact that Bitcoin wallets can be used without disclosing your real name and location, all of your transactions still remain quite public, for everyone to see. Not to mention that most exchanges do require users to provide their real names, which immediately links their transactions to their true identity.
As a result, a new method for making anonymous transactions was needed, and the world soon came up with privacy coins. These are the coins that are strongly focused on privacy and anonymity, keeping as much user information secret as possible. However, not all privacy coins are equally as private, and the worst among them are privacy coins only in name. However, there are also many good ones, that rely on real cryptography-related innovations, like zk-SNARK and ring signatures. So, let's review some of them, and see which privacy coins are actually capable of keeping their users' activities secret.
What are the Best Privacy Coins for Making Anonymous Payments?
- Monero (XMR)
Monero is a top pick on many lists such as this, since it is quite easy to use, while it does what it promises to do. While each BTC transaction is public and transparent, Monero doesn't allow anyone without a corresponding private key to check on your balance or transaction history.
To achieve this, Monero uses two cryptographic elements — stealth addresses, and ring signatures.
Stealth addresses basically work by creating a new address for each transaction. Senders can deposit funds into a secret address, and only the true receiver can access this address. Additionally, only the parties involved in the transaction can see the address.
As for the ring signatures, they basically mix together different transactions on Monero's network. Each of these transactions selects funds from another transaction from the same block. The process is completely random, and nobody on the network can determine which is the original source for any of the transactions included.
Additionally, while all of this may sound complicated at first, it is really easy to do with Monero. All transactions are set to be private by default, meaning that there are no specific features that users need to activate before starting their private trades. Also, Monero's ecosystem is pretty busy, which has resulted in numerous tools and wallets that make the process as simple as it can get.
For managing Monero coins, users can choose from several different wallets, such as Monero Wallet with a full node, Monero Wallet with a remote node, as well as My Monero Wallet. Also, despite the fact that privacy coins are mostly frowned upon in the crypto world, Monero is still listed on 98 exchanges, making it easy to trade as well.
Not only that, but users can also exchange Monero for another coin without having to go to an exchange. This is possible thanks to tools such as ShapeShift and XMR.to.
Also, one thing to note is that, while Monero makes the top of our list, as well as many others, it is not perfect. Perfect privacy doesn't exist, at least not yet. It is still possible that there are bugs in Monero's codebase that might be exploited. This might lead to deanonymizing its network, which is something to keep in mind.
- Bitcoin (BTC)
You may be surprised to see Bitcoin itself on this list, especially since we have mentioned that it is not exactly a privacy coin. However, while it is not completely anonymous, there are still several ways for your transactions to be privatized. Only, these methods require some extra work. Still, many would say that additional work will eventually pay off, especially considering how widely accepted BTC really is.
Bitcoin is often considered to be a pseudonymous crypto. Even though its addresses are not linked to people's real identities, all BTC transactions still remain completely public, as well as the addresses. This means that your transactions can be followed, and if your real identity ever gets connected to a certain address, you will lose all anonymity you thought you had.
However, there are still two ways for you to use Bitcoin as a privacy coin. The first one is to buy BTC anonymously. This means staying out of the exchanges such as Coinbase, which require users to provide their real name and location. To combat this problem, users can turn to numerous P2P services like LocalBitcoins, Paxful, or BitQuick. By using these services, buying BTC anonymously is easy and effective.
While your transactions will still be public, nobody will know who controls the wallet, which gives you at least some level of privacy.
The second method is to buy BTC from a centralized exchange, but then use a mixing service to cover your tracks. Basically, if you were to send BTC from Coinbase straight to darknet market, everyone would know what you did. However, if you use mixer first, your BTC will be deposited into a BTC stash owned by the service. There is a small fee, but you will sever all connections to your coins and would be able to use them without publically displaying that it is you who uses them.
If you choose to use BTC mixer to cover your tracks, it is important to choose the right one. This will require some additional research, but in the end, it is worth the time and effort, since you need to be able to trust a third party to do your mixing.
- ZCash (ZEC)
ZCash is not the best choice if you are a novice in the crypto world. While it has one of the strongest cryptographies around, it is really hard to use it due to limited tools. Additionally, its privacy features are not used that heavily, and most of the top markets on darknet do not even accept it.
However, if you feel confident about being able to overcome such issues, the ZCash might be the best privacy coin around for you.
When it comes to ZCash, the first thing to be aware of is that not all of its transactions are immediately private. To send private transactions, users need to employ its “z address”, which carries additional costs in term of fees. These z addresses are used for making private transactions under heavy encryptions. Additionally, they are invisible to the blockchain, which makes them one of the best privacy solutions.
Not only that, but all balances associated with z addresses are encrypted as well, and are hidden from anyone who doesn't have a private key. Finally, ZCash solves the issue of verifying such transactions by using zk-SNARKs (zero knowledge succinct non-interactive argument of knowledge).
This is a solution created by cryptographers with a very complicated math behind them. However, despite their complex background, they work really simple. All that users need to do is provide cryptographic proof that they have funds, and nothing else needs to be revealed.
While all of this sounds pretty good, there is one downside to using ZCash, and that is the limited number of options when it comes to actually using private transactions. There are only two wallets listed on ZCash that support private transactions — Zcashd, and WinZec. The first one is Linux-based, while the second one is based on Windows, which means that Mac users' options are extremely limited.
- Dash
While Dash technically is a privacy coin, it is not recommended to use this coin due to its weak privacy features. Additionally, this is one of the coins with the worst adoption rate.
Dash's core privacy feature is called Private Send. This is a simplified version of services we have mentioned previously. Basically, three coins are combined into a single transaction, and then the coins are distributed for newly-generated addresses. The process can be repeated eight times in order to confuse anyone who might be following your transaction.
However, Private Send is also undermined completely by the architecture of Dash's own network. Similarly to Bitcoin, Dash is also powered by nodes, which are called “masternodes“. However, unlike BTC's nodes, these are designed to reward their operators. Their job is to secure and validate network's transactions, and through rewards, masternodes receive around 45% of new Dash coins.
The problem lies in the fact that when users use Private Send, masternodes are validating those transactions and are sending them between different addresses. Basically, the masternode that gets to process your transaction sees both the source, as well as the destination of this transaction. Since anyone can run a masternode for only 1,000 Dash, even the government may end up validating your “private” transaction.
- Verge (XVG)
Finally, there is Verge, which is the lowest privacy coin on our list. Verge claims to be secure and anonymous, but its privacy is way below acceptable.
Verge was originally created in 2014, under the name of Dogecoin Dark. It became Verge in 2016, but that doesn't change the fact that it is a fork of Dogecoin. Additionally, Dogecoin came to be as a fork of Litecoin, which is a well-known fork of Bitcoin.
Verge also claims that its privacy comes from the use of Tor, which can hide its users' IP address. However, there is one big flaw in these tactics, and that is that all transactions and addresses are recorded publicly on the blockchain. Buying Verge from a centralized exchange will mean that your address will get connected to your real identity. Additionally, even using cryptos via Tor is a bad plan in the first place.
Another of Verge's efforts to conceal their users' identity is the use of Wraith Protocol, which creates stealth addresses. Simply put, you get a newly-generated address whenever you send XVG, but the problem is that this address doesn't protect the sender's privacy.
In the end, Verge is also a target for 51% attacks more often than any other crypto, which means that there are bugs in its codebase that are getting exploited regularly. What this means is that Verge is not only a barely private coin but also one subjected to constant attacks.