[REPOST] Crypto Academy Season 2, Week 8 - Homework Post for @levycore | Privacy Coins

Hello Everyone,

In the last week of the season two crypto professor @levycore has shared about the Privacy Coins. Thank you Levycore for this tutorial.

Privacy is an essential aspect of life. But do we have privacy in our financial systems? Most of us think we do. But if we do all our spending via a credit card, all of our transactions can be tracked by the bank. Then, if we do those transactions on an online platform they can collect, analyze those data for our purchasing behavior.

On the other hand, if you use cash, there won't be any record of spent money unless the amount of deposit and withdrawal from the bank. One can argue that serial numbers on banknotes can be traced, but it is hard to keep data for such transactions for individuals and won't be practical. Hence, for the traditional financial system they have been able to achieve a level of privacy for the "Cash" but not for the credit cards.

Let's identify whether cryptocurrencies can preserve privacy in our transactions.

Choose a Privacy Coin and perform a fundamental analysis of the coin in detail

Cryptocurrencies have been the alternative for exchanging value that can ensure privacy. But the market leader and well known cryptocurrency such as "Bitcoin" can ensure the privacy of transactions! that's a question to investigate.

When we gain an understanding of privacy coins we can see that Bitcoin or, any popular such currencies in the market aren't really that private as is commonly believed. They certainly can protect some information, but not all of it. Since Blockchain technology uses a public ledger, anyone who wishes to see transactions, can see that someone is sending an asset to someone else. These transactions are reordered as a string of characters. When we use an exchanger we are obliged to provide information such as "know your customer” (KYC) & "antimony laundering" (AML). There is a certain level of traceability exists because of that.

To address this issue privacy coins came into the crypto space with an attempt to send and receive value anonymously. The first introduced coin was dated back to 2014 and is known as XCoin, now the XCoin has rebranded as Dash. Now in 2021, there are 60+ privacy coins in the crypto market. These coins offer enhanced security features to keep users' identities and activities concealed.

👉 To analyze the features in-depth, I have chosen Zcash

“If Bitcoin is like http for money, Zcash is https,"
Quote

That is how Zcash (ZEC) defines themselves. It is a cryptocurrency which was built on the original Bitcoin codebase in late 2016. Zcash allows users to transact without revealing the sender, recipient address and amount transferred.

However, if users wish to grant access to their addresses and transaction, they have the facility to do so. This is a function that does not find in any other privacy coin. Users have greater control over privacy with that feature and that is why Zcash has been promoted as a currency which not facilitate illegal activities. This selective disclosure allows users to share transaction details, for purposes of compliance or audit.

Zcash able to do this with the cryptographic tool called Zero-Knowledge cryptography Proof called zk-SNARKs(zero-knowledge Succinct Non-interactive Argument of Knowledge). It allows participants an option to shield transactions into two separate addresses. Those are, “T” (Transparent) and “Z” (Shielded) addresses.

When there's a shielded address it will be encrypted in a memo field with an additional secure layer which allows nobody can track this transaction nor reveal the sender or recipient addresses, these addresses referred to as “z-addrs”. Comparably, when there's a transparent address it will act the same as Bitcoin addresses in terms of privacy and publicly reveals transaction data, these address referred to as “t-addrs”

source

Between the two types of addresses (z-addrs & t-addrs), there are four types of transactions are involved according to the preference of sender & recipient.

• Private
  Both parties want to shielded addresses (z-addrs) to interact with each other. In this scenario identity of both parties would remain as private and transaction won't be revealed to anyone.

^{Private Transaction Example}

• Deshielding
  If the sender wishes to keep the details private he can use the z-addrs for himself and the receiver address as t-addrs. In this way receiver will be transparent.

^{Deshielding Transaction Example}

• Shielding
  This is a vice versa scenario for Deshielding, here the sender use t-addrs keeping him transparent while the receiver is secured with z-addrs.

^{Shielding Transaction Example}

• Public
  If both parties wish to be transparent, they can use t-addrs and the details would be open to the public.

^{Public Transaction Example}

With the ability of such transparency and privacy Zcash has been able to cater to the right clientele without being fraudulently used in the past. Also, 95% of transaction which involves ZEC blockchain are carried out at public addresses.

👉 Privacy coins Vs Exchangers

The privacy coins are usually listed in a very few exchangers due to the fact that it is privacy-oriented. There can be many legal boundaries for an exchanger to accept coins for their listing. Many popular exchangers does not seem to support private transactions. However, Zcash support exchangers by providing 02 type addresses, since 95% of transaction carried out at public addresses many popular exchangers has accepted services for Zcash.

Here are the exchangers that Zcash accepted, Reference: Coingecko & Coinmarketcap.

^{Zcash listed Exchanges | Coingecko}

^{Zcash listed Exchanges | Coinmarketcap}

👉 Zcash mining

Since it is very similar to Bitcoin, Zcash also use Proof of Work consensus algorithm and the same concepts that are used by Bitcoin. Average time to create a new block for Zcash is 2.5 minutes & block size limit of 2MB, miners get 12.5 ZEC as a reward for mining. To prevent centralization of the network Zcash had a resistance of using ASICs for computing power until 2018. However, since then they approved it on the market but still the many miners prefer GPUs for ZEC mining.

👉 Market Analysis of Zcash

• Symbol: ZEC
• Ranking: 54
• Price: $160.16 (as at 02nd June 2021 UTC: 14:48)
• Market Cap: 1.9B
• Circulating Supply: 11 million (57%)
• Max Supply: 21 million

^{coinmarketcap}

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Describe the steps in creating a wallet for the Privacy Coin of your choice.

Most of the privacy coins encourage their own wallet. Zcash also have their own wallet on the website, we can simply go to the https://z.cash/ and download the wallet. Let's see the steps,

👉 Once you are in the website click "Get a Wallet"

👉 Then you can see different options for Desktop & Mobile to select, I use the laptop so I have selected "ZecWallet Lite"

👉 To download the setup file click "Download for Desktop"

👉 I have clicked "Windows (.MSI)" as my download format

👉 Once the file downloaded, double click on that file to run the set up. In the set up process I chose "Create New" as I want to create a fresh wallet.

👉 In this window you will have a seed phrase which you have to save in a safe place. This seed phrase is the only way to recover your wallet. Then click "Start Wallet"

👉 This is the wallet I have created.

It was quite easy to set up a wallet in Zcash. However, we have to hold responsibility to keep it secure because it is a desktop wallet belongs to us. Wi-Fi networks, malware could possibly make some level of risk. Keeping the seed phrase in a secure place is a must.

Explain the reason you chose the Privacy Coin.

Zcash simply the one of the most innovative privacy-oriented cryptocurrency which available in the today market. The privacy features of Zcash is so unique that none of the other cryptocurrencies has been able to use it. Since it is very similar to Bitcoin protocol and almost have the same codebase, the technology and the consensus mechanism are easy to understand. There are many advantages of using Zcash while there are miner tweaks, let's me elaborate,

Advantages

👉 The transaction speed for Zcash is quite amazing and the cost for a transaction is just 0.0001 Zcash (0.016USD). Unlike the other privacy-oriented cryptocurrencies such as Monero or Dash, Zcash is supported over 100 cryptocurrency exchanges and top wallets in the market.

👉 The control over privacy on a transaction is completely depend on the requirement of the user. That is one of the best feature that Zcash offers, there are Shielded address & Transparent address to choose for a sender and receiver. This allows to limit illicit transactions for both parties and even can disclose transaction for a 03rd party if necessary.

👉 Zcash has a limited supply of coins to the market, which is 21 million ZEC coins. Until now it has produced 57% of coins and has a very similar mining mechanism with BTC. Hence, users and investors can see this coin as a market leaded for privacy coin in the future.

👉 There is a Zcash transaction expiration, if the transaction is not mined within 50 minutes the transaction will expired by default. The reason behind such setting is to minimize the impact of a non-mined transaction.

👉 To enhance the security of a transaction Zcash support multi signatures for a transaction. Here, two or more parties have to agree upon sending the money to the receiver. However, this feature does not support with shielded address and can only perform with transparent addresses.

Disadvantages

👉 Though Zcash is known as decentralized cryptocurrency, the majority of decision making has been done by the ZCash Company and ZCash Foundation. This might lead to a centralized protocols if it continuous that way.

👉 ZCash is an open-source protocol which based on Bitcoin codebase, however they do not have a bug bounty program to identify tweaks in their system. To make it a trusted setup they can activate such programs in the future.

👉 There is a strong rejection from the governments and legal bodies over privacy coins. There might be many battles to win in the future in term of legal boundaries.

👉 Though they provide shielded transaction, only three wallets has been able to cater to shielded transactions. One been their own wallet Zecwallet and other are Nighthawk Wallet & Unstoppable.

Conclusion

To conclude, privacy coin is a cryptocurrency with an additional features like anonymity, fungibility & intractability. Zcash has been able to provide all the features that privacy coin must have and many more. Zcash is a fork of Bitcoin and use the same consensus PoW mechanism. Hence, there are many similarities in the technology but difference Zcash brings to the table is the cryptographic privacy technology called zero-knowledge proofs.

zk-SNARKs feature to enable shielded transactions for its users. The technology which is only native to the Zcash. The users has control over privacy and can decide whether to be transparent or not. This feature enable the possibility of to be listed on many exchanges and wallets. However, there are certain limitation to the technology since governments and legal authorities does not support its every step.

The main concern over privacy coins are the illegal activities such as terrorism, money laundering and tax evasion. While privacy matters for individual users, as a country or region this type of activities are a direct threat to the central control of the world. Hence, government can bring many regulations to rule such projects in the future.

Still, we can see many projects are coming to the market with new inventions. Maybe in the future there can be a privacy coin which has capability to have a control over illicit activities as well.

Thank you!