How Can You Maintain The Privacy in Crypto Today?

While blockchains provide a censorship-resistant means of transferring wealth, they were never intended to provide privacy. However, blockchains such as Monero, Zcash, and Secret Network have established infrastructure enabling private blockchain transactions in the years after Bitcoin’s birth.

Simultaneously, coin mixing technologies such as CoinJoin and Tornado Cash enable users to separate the cryptocurrency they possess from their real-life identities.
On-Chain Privacy Preservation

The cryptocurrency movement has given birth to a more open alternative to the existing financial system. While blockchains such as Bitcoin and Ethereum provide benefits such as financial inclusion and transparency, they are less effective at protecting their users’ privacy. In response to the requirement to assist users in remaining private, numerous blockchain-based solutions have emerged.

Monero

Monero is perhaps the most successful privacy-focused blockchain that is still being developed and utilized today. The network, formerly known as BitMonero, was launched in 2014 and has lasted thanks to its best-in-class anonymity, breadth of privacy-preserving features, and active development community, which still includes many early contributors.

Monero conceals the identities of senders and receivers, as well as the amounts exchanged in transactions, by masking the addresses used by participants. The network conceals transaction data using a variety of privacy-preserving techniques such as ring signatures, zero-knowledge proofs, stealth addresses, and IP address masking techniques.

In the eight years since its inception, Monero has received multiple modifications to strengthen its security and privacy features. To prevent application-specific integrated circuit (ASIC) equipment from mining Monero, the network altered its Proof-of-Work algorithm from CryptoNight to RandomX in December 2019. The change increased network security by making it more difficult and costly to 51% attack the network.

Monero will incorporate ZK-SNARKs into its privacy technology around May 2020. Transactions became quicker, more efficient, and required fewer confirmations as a result of this. Monero further protects anonymity by using coins that are totally fungible. Unlike Bitcoin, where individual coins may possibly be tracked back to every wallet that had them and when they were mined, Monero’s XMR currencies are fully interchangeable.

However, because Monero is now regarded as the gold standard for crypto privacy and anonymity, it has emerged as the blockchain of choice for thieves. Monero has been used in illegal operations by ransomware groups, darknet marketplace users, and even North Korean hackers. As a result, the Internal Revenue Service has set aside up to $625,000 in incentives for contractors who can build Monero tracking capabilities. No bounties have been claimed as of yet, which testifies to Monero’s anonymity technology.

Zcash

While Monero is the most widely used privacy-preserving blockchain, it is far from the only one. Zcash is another popular blockchain among privacy aficionados. Zcash, which was launched in 2016, employs zero-knowledge proofs to authenticate transactions without disclosing the sender, receiver, or transaction amount.

Zero-knowledge proofs employ sophisticated encryption to allow parties to confirm transaction details without disclosing any details to one another. ZK-proofs do this by using a unique set of verifying keys that are shared by all network members. These keys enable network members to cryptographically confirm changes to the Zcash ledger without disclosing which addresses were involved or how much money was exchanged.

There is one significant distinction between Monero and Zcash. While all Monero transactions must employ the network’s privacy features, privacy measures in Zcash are optional and are not enabled by default. While this approach makes it easy to broadcast transactions publicly if necessary, it has also had the unforeseen consequence of jeopardizing the anonymity of people attempting to conceal their transactions.

At the moment, fewer than 20% of all Zcash transactions make full advantage of the network’s privacy-preserving features. When only a tiny percentage of total users hide their transactions, an attacker has a considerably easier time isolating the few users who are using the privacy features, possibly compromising the privacy of their transactions. On the other hand, because all Monero transactions must adhere to the network’s strict privacy scheme, no transaction stands out from the rest, ensuring maximum anonymity for all users.

Despite this flaw, the technology underlying Zcash is just as secure, if not more so, than Monero. Without the network formation event keys, the method safeguarding Zcash transactions is theoretically impossible to breach. However, if these keys were not deleted and are still in existence, they might be used to attack the network by minting an infinite number of new coins or fabricating transactions.

Vitalik Buterin, co-founder of Ethereum, lauded Zcash’s zero-knowledge cryptography, stating that the network is involved in “cutting-edge research and application of privacy technology.” He also serves on the scientific advisory board of the Electric Coin Company, which created Zcash.

Secrets Network

Secret Network is a new privacy-focused blockchain that is gaining popularity. Secret Network, unlike Monero and Zcash, is Turing complete. That is, it is capable of handling smart contracts such as those found on blockchains such as Ethereum and Solana. The network is pioneering “Secret Finance,” which consists of DeFi apps powered by privately encrypted smart contracts. Secret Contracts provide privacy by encrypting all transaction input, state, and output.

Other transaction parameters, including as block height, time, chain ID, sender, address, transferred money, and contract hash, are not encrypted, in contrast to Monero and Zcash. As a result, Secret Network is less concerned with anonymity than other privacy-focused networks, but it nevertheless assures that interactions between users and smart contracts are totally secret. Private smart contracts have various advantages over public smart contracts.

Unlike Ethereum and other Layer 1 networks, Secret Network transactions are immune to frontrunning because they are never accessible in the mempool. This implies that opportunists will be unable to extract revenue using MEV, a common technique in which users pay to reorder transactions in blocks.

Furthermore, because Secret Network’s smart contracts function as encrypted “black boxes,” they may manage sensitive data without risk of public disclosure. This promise enables private blockchain networks to conduct their operations on Secret Network, enabling compatibility with other network-built apps.

The privacy advantages of Secret Network go beyond its own apps and token. Users may utilize the network’s “Secret Bridges” to connect tokens from other networks, like as Ethereum or BNB Chain, and benefit from all of Secret Network’s privacy-preserving capabilities. When assets are bridged, they are encrypted and only available to their owners or those with a viewing key. Tokens that have been bridged can then be utilized throughout the Secret Network ecosystem.

Despite all of its promises, Secret Network’s technology is somewhat untested when compared to the more time-tested Monero and Zcash. The network issued its genesis block in February 2020 and has just recently begun enrolling a huge number of users.

According to Defi Llama statistics, Secret Network presently has just $40 million in total value locked across its DeFi protocols, demonstrating how immature its ecosystem is in comparison to other competing Layer 1 blockchains. Despite its modest usage, the network’s native SCRT coin has a market worth of more than $766.7 million.

Coin Mixers

While dedicated privacy-preserving blockchains provide excellent means to remain private, users with funds on other public blockchains such as Bitcoin and Ethereum may also choose to take privacy precautions. Because of the nature of how most networks operate, network activity cannot be disguised; however, coin mixing services may be used to disrupt the trail of transactions between addresses, allowing users to keep their crypto wallets distinct from their real-life identities.

Someone can desire to employ coin mixing services for a variety of reasons. Mixers are frequently used for operational security. People with a significant amount of crypto money linked to their real-life identities have become increasingly vulnerable to hackers, social engineering schemes, and even kidnapping.

Wallets containing large quantities of currency are completely accessible on-chain and may be easily tracked back to the holder’s real-life identity. Coin mixing services like CoinJoins and Tornado Cash can assist customers sever the link between their high-value crypto wallets and their real-life identities, therefore protecting them from being targeted.

CoinJoin

CoinJoin employs a transaction privacy approach in which many users work together to conceal the origins and destinations of Bitcoin transmitted between them. Users sign a digital smart contract to combine their coins in a new Bitcoin transaction, the output of which leaves participants with the same number of coins but mingles the addresses to make external tracking difficult. The method anonymizes Bitcoin transactions without requiring a centralized operator.

Greg Maxwell first proposed the CoinJoin process in 2013, and it has since become one of the most popular ways for Bitcoin holders to maintain their privacy. The most difficult part of using CoinJoin at first was finding enough holders who also wanted to mix their coins. Bitcoin wallets such as Wasabi and Samourai have now directly implemented CoinJoin, providing users with an easy way to connect, mix coins, and maintain privacy.

While coin mixing effectively maintains the privacy of Bitcoin holdings, there is mounting evidence that coin mixing via CoinJoin may not be as secure as previously thought. Forbes journalist Laura Shin claimed in February that blockchain data platform Chainalysis was able to “demix” Bitcoins sent via CoinJoin in order to identify the 2016 Ethereum DAO hacker. While it is theoretically possible to demix CoinJoin, it is unclear whether Chainalysis discovered a way to trace mixed Bitcoins or whether the hacker made mistakes that led to his identity being revealed.

Tornado Cash

Those looking to remain anonymous on Ethereum can use Tornado Cash, a dedicated coin mixing platform. It operates on the same principles as CoinJoin, with the exception that users are not required to find other parties to mix their coins with. Instead, advanced smart contracts enabled by Ethereum handle the mixing process.
Tornado Cash is frequently marketed as more secure than combining Bitcoin via CoinJoin.

Rather than simply obscuring transaction data, the process connects input and output accounts using zero-knowledge proofs. As long as the user does not inadvertently compromise their own privacy, it is theoretically impossible to connect the address that deposited Ethereum into Tornado Cash and the wallet that eventually receives it.

Users generate a random key and deposit Ethereum or ERC-20 tokens before submitting a hash of their key to the Tornado Cash smart contract. It is recommended to wait some time after depositing before withdrawing funds to a new wallet. The longer the time between deposit and withdrawal, the more secure the transfer. To withdraw funds, users must provide Tornado Cash with a zero-knowledge proof of their key, and the smart contract will transfer the funds to a specified recipient.

Final Thoughts

Staying private is extremely important for many cryptocurrency holders. Blockchains and protocols that protect user privacy, such as Zcash and Tornado Cash, help users maintain their privacy, improve security for high-net-worth individuals, and enable those living under totalitarian regimes to preserve their assets. However, it is also necessary to recognize the costs of privacy. Blockchains such as Monero have assisted fraudsters in carrying out ransomware attacks and concealing millions of dollars. Tornado Cash also allows hackers to launder stolen tokens obtained through DeFi protocol vulnerabilities and phishing assaults.

As cryptocurrency becomes more widespread, governments are expected to tighten down on privacy-preserving technology in order to reduce crypto-related crime. While this is a noble objective, achieving a balance between privacy and crime reduction will be critical in allowing crypto technologies to realize their full potential.