The Curious Case of Cryptocurrency Coin Privacy and User Protection
Pakistan yesterday inaugurated it's new Electronic Money Institutions regulatory framework. They had been working with the FATF intimately before that to make a robust framework. The FATF has been busy pushing the same regulations around the world, with Pakistan only being the latest example.
Finland's new laws have opened up one of the oldest anonymous crypto exchanges to regulatory pressures. Localbitcoins‘ anonymous, in-person trading has been wiped out by the combined pressures of the EU and the Finnish financial watch-dog.
Many people are now looking to privacy coins to fill a gap in the market that has been severely hurting over the last year. Privacy coins have functionality built into their architecture to hide an identity when making transactions online. The questions being asked are key.
Do these coins have a place in the modern cryptocurrency landscape? Is there a real, proper reason to promote complete privacy? Are these coins just a last-ditch attempt to help people evade taxes, hide assets and pay for illicit goods on websites similar to The Silk Road?
Bitcoin's introduction was as a currency that could be digital cash. No one could track what you bought, where you bought it or from whom you bought it. It was one of the unique selling points of the technology.
Fast forward a few years and people found out that IP addresses were linked to Bitcoin and Ethereum usernames thanks to metadata. All transactions being broadcast publically, so privacy was only ever an interesting thought experiment when it came to Bitcoin.
What is cryptocurrency privacy?
When talking about privacy within the sphere of cryptocurrencies, there are three questions that need asking. The first is “Do I know the identity of the user?”. The second question is “Am I able to view transaction data sent by other users?”. The third question is “Is it possible to check all blockchain transaction data and identify which addresses have what amounts?”.
If the answer to all three of those questions is a resounding “NO!”, then congratulations. You have found yourself a proper privacy coin. The creme da la creme of anonymous cryptocurrency. One such example is Grin. Another is Zcash.
Then there are various combinations of the three questions. Maybe you can see the identity of the user performing the transaction, but not anything else. You might see the identity of the user and all users that have transacted with them but nothing on the blockchain. There are various cryptocurrencies with various implementations.
IF you looked at Bitcoin – the answer to those three questions would all be “yes”. So, not exactly the most private coin. It is possible with hard work, but otherwise… not so much.
What features do privacy coins have?
There are various approached to the implementation of privacy coins. Taking a look at some of the more popular ones.
The so-called Layer-2 protocols, among which the Lightning Network and Plasma are included, are not really popular with fanatical privacy advocates. They are popular with casual users who value more privacy than usual but aren't too bothered to really use it properly.
Kind of like the crazy uncle who uses Facebook to tell everyone that Facebook is spying on you. His privacy settings are barely touched, but it's all he talks about. The problem with Layer-2 protocols is that they often have different layers of privacy for off-chain states, so you can never be too sure.
Grin and Verge use the TOR system. Multi-layered Onion routing to hide the users' IP addresses. This is quite a mean feat, and those two coins are among the most secure from a privacy standpoint.
Mimblewimble is a set of protocols that use CoinJohns. It allows for public verification but does not show any useful information such as amounts or addresses. It also hops between nodes before it releases info to neighboring nodes using the Dandelion gossip protocol.
Zcash, Monero, and Grin the kings of privacy
All three of these coins have the trifecta that was mentioned earlier. However, Grin is special in that it uses the brand new MimbleWimble protocol to ensure 100% privacy. In the last quarter, Grin has lost ground. Many believe that the market does not see a place for it amid the massive rush of regulation.
Privacy advocates argue that it will show its true value over time.