Privacy Tokens

Why use a privacy token?

Public ledgers are transparent; they show transactions and total holdings of users. While these transactions aren't tied to a particular name, they do expose sensitive information.

Typically when we pay for something, we aren't accustomed to exposing our entire spending history our or current balances of our account. For example, when you buy a coffee, the coffee shop doesn't know how much money you have, they just receive a small payment for your coffee. This type of information is also of a high value to advertisers, etc. who typically pay a large sum for anonymized transaction histories. Likewise, the coffee shop doesn't expose all of it's customers or vendors when receiving payment.

Additionally, there is risk that comes from having your identity tied to an account. Despite transactions being tied to pseudoanonymous addresses, the coins (in most situations) will ultimately be linked to personally identifiable information through re-use, IP address sniffing nodes, exchanges, or merchants. In some situations, these wallets could be blacklisted, locking the funds forever.

As Dark Net Markets are being compromised, it would be a prudent idea for anyone requiring OP Sec to transact using a privacy based coin. With the news of Bitcoin accounts being linked to individuals, a rise in privacy tokens could be coming through additional usage for illicit goods and services.

We'll take a look at 4 of the coins that are centered around privacy: Monero, ZCash, Dash, and PIVX.

Monero (https://getmonero.org/)

Monero is a private, secure, and untraceable currency. Like cash, it is fungible; there is no history to trace. Monero transactions are not viewable on the blockchain nor are addresses nor wallet balances. The privacy features hide the sender, receiver, transaction histories, and amount of value transferred.

The Monero system uses Ring Confidential Transactions, which creates a series of potentially viable outputs to obscure the transaction. To an outsider, the decoy transactions are indistinguishable from the real transaction. The real transaction is sent from stealth wallet address, and the transaction is only visible to the recipient.

Without having addresses and balances visible on the blockchain, merchants and individuals can keep their total net worth hidden from public viewing. Most people are accustomed to not exposing their net worth while making a purchase using cash or a credit card. Removing publicly visible balances eliminates the need to have a hot and cold wallet or burner wallets for single transactions.

ZCash (https://z.cash/)

ZCash originated as an improvement of bitcoin that was not integrated to the codebase. The protocol is a zk-SNARKs algorithm that allows for zero-knowledge proof without revealing the sensitive data. 

ZCash allows for anonymous transactions, but does not require them. Mixing is not required either. This could lead to exposure of personal information by allowing exchanges or markets to opt for only visible transactions. At this time, there is a significant computational expense to creating a private transaction and less than 10% of the transactions on the network are "shielded" transactions.

The zk-SNARKs protocol is on the roadmap for Ethereum and could be implemented on other chains without issues. This should be a red flag, as this would leave ZCash without a unique value proposition.

Dash (https://www.dash.org/)

Dash provides a private, instant, verified transaction. 

Dash is a Proof-of-Work system that has two types of nodes on the network; masternodes and miners. Masternodes provide instant send and private send capabilities. Instant send allows for masternodes to come to a consensus in just over a second, creating and irreversible transaction. The private send uses CoinJoin to obfuscate the receiver and sender of a particular transaction. Being proof-of-work, there are also mining nodes that compute hashes in order to cryptographically secure the blockchain.

The block rewards on the system are split into three parts, 45% goes to the miners, 45% goes to the masternodes, and 10% goes to the treasury. The block tax goes to dash to continue development and marketing operations.

Dash relies on masternodes to create an obfuscated transaction, and this type of transaction is not required. This creates a point of weakness, where bad actor masternodes could identify a transaction. Dash puts a premium on the masternodes, which creates a two tier system and are at this point cost prohibitive. This creates some centralization. Dash is also heavily criticized due to its tax for continued development and significant pre-mine. Further, addresses and their values are visible on the blockchain, which creates opportunities for sensorship, blacklisting, and possibly being able to link to personally identifiable information.

PIVX (https://pivx.org/)

PIVX is a re-brand of the Darknet Coin, and stands for private instant verified transaction. 

PIVX is an amalgamation of the best parts of many currencies. It is a fork from Dash, implements Bitcoin Improvement Proposals (BIP), and utilizes proof-of-stake to secure the network. 

Like Dash, there is a two class system on the blockchain, with masternodes and miners (verifiers). They are similar to their Dash counterparts, with a few exceptions.

The system has an innovative reward system, where the rewards paid to the verifiers and the masternodes adjusts dynamically. This does not leave the rewards at a constant scale (45/45/10), like Dash. Each transaction does have a 10% fee that goes towards the project, and not as a reward for the blocks. The verifiers stake any amount of PIVX and receive emission of new coins and fees. Masternodes lock up a larger amount (10,000 PIV), receive governance rights, as well as block rewards. At this time, the expected rate of return on staking or a masternode is 5%.

Masternodes perform a CoinJoin operation to obfuscate transactions and also receive a reward for each block. The CoinJoin operation combines transactions so there aren’t clear sender/receiver pairs within a block. This is the main security feature of PIVX currently. In the near future, the Zerocash protocol will be implemented, which will allow for the creation of anonymous coins that can be used in transactions that do not identify the origin address, the recipient address, or the amount.

Like Dash, the system is not truly private (at the moment). The current operation relies on the masternodes to obscure transactions and addresses are publicly viewable on the blockchain.

Usage

If you’re looking for guaranteed private transactions, Monero is the only option. Others provide a level of anonymity, but it is not required and possibly can be traced.

Investment

Monero seems to be the safest choice here, again. With many dark net markets and sellers being compromised, a move to accepting a private coin makes sense. A realistic future could include Bitcoin as a store of value, Ethereum as a day-to-day currency for apps and traditional purchases, with Monero handling any private transactions.

PIVX is an interesting choice since it has a much lower market-cap and ambitious goals. If it succeeds in adding a zero coin protocol then it could challenge Monero as a completely private coin.