The Real Anonymity of Cryptocurrencies

Many people still consider that all cryptocurrencies are anonymous. It’s a result of the ongoing marketing work of many companies, bloggers, and others seeking to capitalize on the industry.

The main misconception now is that bitcoin and cryptocurrency as a whole are segregation from the banking system and the inability to track the sources of money transactions. But this is not factual. If people need anonymity, then you need to look towards entirely different coins. In this article, we will look at truly anonymous coins.

Cryptocurrency Anonymity Issues Today

Recently, control over cryptocurrencies has become stronger. The Fifth Anti-Money Laundering Directive (5AMLD), which was adopted by the EU in May 2018, enters into force on January 10, 2020.

The directive requires mandatory verification of all clients of cryptocurrency platforms in conjunction with the KYC and AML standards. These standards require all users making cryptocurrency transactions to verify their identity.

Companies such as Chainalysis and Crystal (a division of BitFury), which aim to seek out scammers in the industry, also began to appear. The victim of their work is the anonymity of users. Imagine this situation; you decided to sell your BTC for fiat, found the best exchange rate on BestChange, made a deal, and already forgot about it. But then “your former” BTC was spent at a website with prohibited goods. Most of the bitcoin addresses of such sites are known. So Chainalysis, which collaborates with Binance and Bitstamp, starts looking for where the funds for this prohibited purchase came. Low and behold, they end up at a Binance account belonging to you, a respectable citizen who went through the KYC procedure. Right now, you will not have any problems, but in the future, they may appear.

Below we have collected cryptocurrencies that will help you not only to be anonymous but also to maintain your privacy by not allowing Chainalysis and Crystal to track the movement of your funds.

Monero (XMR)

Cryptocurrency, based on the CryptoNote protocol, focused on increased transaction privacy.

The CryptoNote protocol is based on ring signatures (signatures) and stealth addresses.

A ring signature is a type of digital signature in which a group of possible “signatories” joins together to form a clear signature that allows authorization of the transaction. Ring signatures are used to hide the real inputs of transactions in such a way that it is impossible to tell what kind of history each transaction in the chain has.

• Ring signatures apply to every input of every transaction.
• The sender randomly selects other outputs with the same amount from the blockchain and signs them with his private key.
• The sender does not need any confirmation from the owners of other outputs.

A Stealth-address is a public address you can pass on to anyone, without allowing observers to know anything about the transaction history or the balance of that address. The Monero address system uses two private keys: viewkey (the key for viewing) and spendkey (the key for spending), both are encoded in the Stealth address.

The private key for spending works like a similar private key in Bitcoin — you sign transactions with it. The keys for viewing are used to search for incoming payments in the blockchain. Only if you have access to the key for viewing can you find out the exact transaction output associated with a Monero address.

But Monero has a pitfall in the form of a human factor. If you use a Stealth-address in several places, then you can link them together, that is, if you have withdrawn funds from the exchange, and then you decided to accept donations to this address, then the conclusion suggests itself. For this reason, privacy experts recommend using the “one-time address” technique for each of the services.

Dash (DASH)

An open-source fork of Bitcoin using a mechanism to increase transaction confidentiality.

Dash (formerly DarkCoin, before that XCoin) was developed by Evan Duffield, who first offered his best practices on transaction anonymity for Bitcoin, but refused to bring his suggestions into the source code. Unique Dash makes InstantSend, PrivateSend, and DAO.

InstantSend is an instant cryptocurrency exchange technology. Users of traditional cryptocurrencies must wait a period of time to make sure that the transaction is irreversible and is not an attempt at double-spending. It takes valuable time that the Dash network was able to reduce.

There are two levels in the network:

1. Miners mining cryptocurrency.
2. Masternodes — Provide PrivateSend, InstantSend, and also a management system (DAO).

PrivateSend is the service that got Dash into this article.

PrivateSend mechanism includes several procedures:

1. The breakdown of the inputs that form your funds into standard denominations: 0.01, 0.1, 1, and 10 DASH is about the same as regular bills that you use every day.
2. Then your wallet sends out requests to specialized servers on the network called “masternodes.” The requests received by masternodes contain information about the denominations that you would like to mix, but do not provide any identifying information. No one can track the author of the request.
3. When two requests for mixing the same values ​​meet on the network, the mixing session begins. Masternodes mix inputs and instruct wallets to pay them back to themselves. Your wallet pays the face value directly to itself, but a different address called the change address.
4. Your wallet must repeat this procedure several times with each denomination to completely hide your funds. Each time the process ends, it is called a “round.” Each round of PrivateSend dramatically complicates the determination of the source of your funds. The user can choose between 2–8 rounds of mixing.
5. The mixing process works automatically in the background and does not require intervention. When you want to complete a transaction, your funds will already be anonymized, and no additional waiting is needed.

Dash had two unpleasant stories, and both of them are associated with greed.

1. In the first two days of launch, 1.9 million coins were mined (about 10% of the hardcap). Evan Duffield said this was due to a bug that appeared when the Litecoin code forked when creating Dash. But he proposed a solution: “Restart the coin. Carry out an airdrop (distribution) so that the initial distribution is wider.” The community, however, did not respond well to this proposal. Most mined coins were distributed later on exchanges at meager prices.
2. The peak of DASH cost was USD 1,532. Then, masternodes were very expensive. A stake of 1,000 DASH was needed to start one masternode. This massive investment led to the suspicions that a group of masternode holders entered into a cartel and gradually redeemed from the DASH market, artificially raising the price of the coin and increasing the necessary amount to start the node, thereby preventing new members from joining the DAO Dash.

Zcash (ZEC)

An Open Source Cryptocurrency Developed by Zerocoin Electric Coin Company.

Zcash is the first cryptocurrency based on the Zero-knowledge proof cryptographic protocol of evidence. The logic of the protocol assumes that one of the interacting parties can verify the reliability of the mathematical statement, while not having any other information from the second side.

The main feature of Zcash is addresses, which can be private (z-addresses) or public (t-addresses). Z-addresses begin with the symbol “z,” and t-addresses — with the symbol “t.”

Transaction Z — Z is displayed on the public blockchain. Therefore it is known about it and the transaction fee. However, the addresses, transaction amount, and notes field are encrypted and not publicly available. The use of encryption in the blockchain is possible only through the use of evidence with zero disclosure.

Zero-disclosure proof is a cryptographic principle that allows you to verify transactions with encrypted data of the sender address, recipient address, and the amount transferred.

Zcash uses a specific type of evidence with zero disclosure called zk-SNARKs. To do this, in the Zcash transaction, the sender generates a data string (“key tuple”) consisting of an expense key, a view key, and a billing address. The sender cannot generate this line if he does not own the spending keys or if the values ​​of sending and receiving are not equal. Zk-SNARKs also creates a unique nullifying function that marks tokens as spent after the transaction completes. Typically, the collection of billing address, browse keys, and expense keys are encrypted and inaccessible to users. Thus, the transaction is verified while maintaining the confidentiality of its details. However, Zcash can conduct public transactions, providing, in this case, all the key data.

The owner of the address can disclose the z-address and transaction information to trusted third parties (for example, for audit purposes and ensuring compliance with legal requirements) by using the keys to view and disclose payment data.

Transactions between two transparent addresses (t-addresses) occur as in bitcoin: information about the sender, receiver, and the amount of the transaction is available publicly. Currently, many exchanges and wallets use only t-addresses.

These two types of Zcash addresses can interact with each other. You can transfer funds between z-addresses and t-addresses.

Read more about all the features of Zcash on the Electric Coin blog.

4,5. Grin (GRIN) and Beam (BEAM)

Two Cryptocurrencies Based on the MimbleWimble protocol.

They differ significantly from each other in terms of the approaches used: Beam has the structure of a product or company, while Grin is an open-source project developed by the community.

Key differences:

1. The Grin development team has opted for an open-source management model, relying on donations to help fund development. The project did not conduct an ICO, did not conduct a mine, no company, fund, or private persons control it. Before BEAM launched its main network, the Beam team held a round of private financing, and also (by analogy with Zcash) created a special fund to which receives 20% of mining rewards.
2. GRIN bases its monetary policy on an inflationary model that assumes an infinite issue of coins and a constant reward for a block found (60 Grin). The block creation time is one minute. Beam adheres to a deflationary model with limited emissions (about 263 million coins) and a periodic halving of the award to miners. The size of the reward was 100 coins when the network launched. The first reward reduction in half will take place a year after launch, and then will occur every four years.

What Combines Grin and Beam? Mimblewimble Protocol.

MimbleWimble is a PoW-protocol with scalability and increased privacy.

The main requirement for the participants of a Mimblewimble transaction is to prove that no new coins were created. For this, a balance equation is created that demonstrates that the sum of the outputs, minus the inputs, is zero. Moreover, when adding “blinding factors,” the equation remains true. Take the transaction equation as an example: 17 + 12 = 29, where 17 and 12 are the outputs, and 29 is the input, then an arbitrary “blinding factor” is added, in this case the number 11, we get: 17 * 11 + 12 * 11 = 29 * 11, or 187 + 132 = 319. The balance equation still proves that no new coins were created, but without knowing the “secret number” 11, it is impossible to get the original details of the transaction.

This scheme also allows solving the scaling problem by discarding inputs and outputs that have already been “self-verified”: when using Mimblewimble, the nodes need to know that the specific outputs are valid. In contrast, the Bitcoin network needs to validate the entire blockchain to confirm the last operation. Mimblewimble grows with the number of users, and the transaction data stored on the blockchain does not increase: nodes only store unused outputs and block headers. In turn, the removal of “redundant” data also contributes to increased privacy.

The next improvement that follows from this is that the concept of transaction history disappears, which makes tokens interchangeable, unlike today’s bitcoins. Interchangeability is a crucial characteristic of a currency.

Comparison of disassembled cryptocurrencies on a 10 point scale by key parameters

Explanations:

• Exchange prevalence was estimated based on Coinmarketcap.com data. It is essential to clarify that all anonymous cryptocurrencies have been removed from several Korean exchanges, such as Upbit or Okex Korea.
  Beam and Grin got a low score because they are relatively new cryptocurrencies, and are traded on a small number of exchanges.
  Grin is the only one cryptocurrency of this list that is missing from Binance.
• Transaction speed was estimated based on peak values and statements from developers.
  Dash scored 10 points thanks to the built-in instant transaction service.
• The stability of the course was estimated based on the data of the cryptorank.io service.
  Grin and Beam got such high marks because they didn’t make it to the 2018 season when Monero, Dash, and Zcash set price records.

Summary

The main difference between all these cryptocurrencies from Bitcoin is that you can not disclose the amount of funds stored in your wallets and transaction history. Even though Bitcoin is not an anonymous coin, it does have services that allow maintaining the confidentiality of Bitcoin transfers. For example, anonymous BTC mixers, their principle of operation is quite simple: you deposit to the specified address, your BTC are split into smaller parts, mixed with other coins, and you get “cleared coins” at the output. But services like Chainalysis are becoming more sophisticated and can unravel transaction chains in mixers with a very high chance of success. So if you need anonymity/privacy/confidentiality, it is better to stop relying on bitcoin, and at the same time, stop listening to those who claim the anonymity of the first cryptocurrency.