Most blockchain cryptocurrencies are highly transparent due to the public protocols. Anyone on the blockchain ledger could view info about all the available transactions. The anonymity of such cryptocurrencies as Bitcoin doesn’t exist. Of course, it is really difficult to actually determine real people and their online pseudonymous, but when talking about the email addresses it is possible to trace all the transactions of a specific user. More privacy in the crypto world can be added by the implementation of additional cryptographic technologies.
In this article, we will discuss some helpful anonymity methods and an explanation of their functioning. Extra privacy can be accessible via the implementation of these anti-tracking techniques so let’s find out more about them.
Anonymity vs. Traceability
Most cryptocurrencies such as Bitcoin use transactions that are made up of specific inputs and outputs at a specific time. These transactions are left on the blockchain as UTXO or unspent transaction output. With the analysis programs in blockchain, it is possible to trace the outputs and inputs.
For anonymity purposes, users can make as many addresses for receiving and sending the transactions as it is needed. However, in case they are not attentive and miss something then the data leakage is possible. Depending on the structure of the transactions, it can be possible to find out about the recipient, sender, and even the amount of the sent currency.
Let’s practically explain what users can do to create a risky leakage situation. For instance, a person shares a public address on the blog or a website for donations. This user can be easily traced by governmental organizations. As you see, there is no connection with crypto anonymity, but more with the users’ inattentiveness.
Users who prioritize their anonymity should be careful about the information they are sharing online. To get the needed level of protection, users are recommended to implement protocol-level features, mixers, or CoinJoins.
Regulation and Coin Mixers
Users who are looking for more privacy when sending and receiving transactions can try mixers. These services offer anonymous transactions and additional security.
The process of mixers functioning is really simple, users send their currency to the service which kind of mixes the existing pool and de-links the transactions’ tail. This is not a free option and should be paid for.
There are a couple of security concerns connected with mixers’ usage which we will discuss later in the article. If shortly, at the very beginning only trusted third parties could offer such services and right now the number of such resources has grown and situations can be various.
More and more methods for transaction security are created. They help to hide the recipient, sender, and the amount of currency. One of such non-custodial variants is CoinJoin. This tool is designed by the Bitcoin developers. The service works the following way – 2 or more users mix the inputs that will be sent to 2 or more outputs. A usual observer who will review the blockchain won’t detect the addresses or currency sums. The recipient also could not determine the address of the sender. The only detectable thing on the blockchain will be the address of the recipient.
Transactions via CoinJoin are simple in initiations, and there is no need for the coins or control keys. The only obvious trouble is that users need to wait sometime before others will join the needed transaction.
Security Concerns with Coin Mixers
The major concern of cryptocurrency transactions via mixers is related to the service providers. There are different mixers and no one guarantees you 100 percent honest money operation. Some providers can leave the transactions’ records, while in rare cases there are scenarios that cryptocurrency won’t get to the recipient.
Another security issue is not related to the providers. Even when a provider is reliable, you can receive a coin that is tainted by criminals. Users may get “strange” coins because criminals might use the same service. Of course, such tainted coins are undesirable and that may create additional concerns among the users.
Recently, there were made a couple of improvements to the transactions’ mixers. A smart pool was implemented, and user-submitted funds can be mixed with investors. The stealth pool completely separates investor cryptocurrency from user-submitted currency. In such a way, there are minimal risks of receiving tainted coins via such transactions.
Privacy Innovations in the Crypto World
All the above-discussed tools are definitely important when talking about the improvement of the transactions’ privacy. Users will definitely notice how the anonymity level changes with the implementation of mixers. Except for already mentioned tools, there are a couple of others that are easier to use for new clients.
Users also worry that most mixers are not the default mode of the Bitcoin blockchain. That means third parties can access unnecessary information. For those reasons and lots of others, developers started designing new currencies that have privacy methods right away and users don’t need to search for anonymity tools. These privacycoins are not the same as Bitcoins. These cryptocurrencies are based on blockchain technology, but they are hiding a sum of the transactions, recipients, and senders from third parties.
Bitcoin and other cryptocurrencies are fully transparent with the users and anyone can check the available transactions on the blockchain. This is a major principle of such crypto. While privacy-preserving virtual money tries to create both authentication and privacy for the users.
Privacy Coins and Mixing Techniques
When talking specifically about privacy coins, the oldest one is called Zcash. The idea of its creation started in 2016 from a research project. The supply limitation of this cryptocurrency is 21 million and it is validated in a standard way by the network of miners. A huge advantage of Zcash compared with similar Bitcoin cryptocurrencies is better privacy at the protocol level. There are 2 options that any user can try on Zcash, transactions via a public address or transactions via hidden addresses. These “shielded” addresses are verified on the blockchain.
The creation of these shielded transactions is revolutionary and very important for privacy reasons. The statistical data shows that such transactions are not highly popular, only a small percentage of users try them. Most other clients continue usage of the standard transparent transactions. The percentage of shielded transactions in 2020 was only 6.
These hidden transactions can be made visible if the recipient or senders want that. It may be done by sharing a view key. Zcash is not as popular as standard cryptocurrencies, but it definitely offers a new level of privacy to the users.
Another variant of privacy-preserving virtual money is Monero. This crypto hides all the transactions’ info by default, but users can share some data if there is a necessity. This is a really fun system to explore because information about the recipients, senders, and sums of currencies is fully hidden.
The privacy level on Monero is received through the ring signature approach. This method is really secure because one user signature is mixed with a group of others so it is impossible to detect the initiating signature. Moreover, it is a default method so no one will pay attention to whether or not you are using hidden transactions.
Coin Mixers in Action: Real-Life Scenarios
Of course, one may say that there are lots of issues and concerns connected with the usage of cryptocurrencies in general and privacy-preserving money in particular, but the major point of all these technologies is freedom.
The improvement of privacy in the crypto world has made a big step and now individual users feel so much safer. Small businesses started using cryptocurrencies because of fewer vulnerabilities to possible online attacks.
The usage of private financial systems doesn’t mean that those users conduct illegal activity. Usually, clients just don’t want to share their private information online. Some users don’t want to be targeted by advertisement companies who track their previous online orders. Marketing agencies analyze tons of info and create adv strategies based on these results. So, if a regular user doesn’t like these targeting ads, then why not use cryptocurrency for your online purchases?
When generalizing all these small benefits of cryptocurrency usage, each of us just needs this freedom and privacy. It is a right of every human being to get freedom and crypto is trying to offer this level of comfort to any user around the globe. Privacy-preserving tools are perfect for getting the level of security you might want and deserve. Online transparency is theoretically good, but whether it will function properly with all the cryptocurrencies for lots of years?