Privacy coins explained: What are they and how do they work?
Do you think leading coins like Bitcoin provide the highest degree of anonymity? Find out here at Gamdom what privacy coins are and how they work.
Privacy coins explained: What are they and how do they work?
Anonymity and privacy are the strongest selling points of the crypto industry. Only that, many enthusiasts deem that popular digital currencies like Bitcoin lack these qualities up to some extent, which is true because of ‘privacy coins’ circulating across the market. Join us here at Gamdom as we learn what are privacy coins and how do privacy coins work.
The future of global finance is bright because of digital currencies’ increasing potential and popularity in replacing traditional legal tenders. Although they provide better, faster, and more convenient peer-to-peer (P2P) transactions that are accessible in far more markets, they still have challenges that the community are yet to address, such as less privacy.
It has been a common misconception for years that digital currencies, especially Bitcoin, are private systems. Instead, transactions are hashed and not encrypted, thus being anonymous but not completely private. Since they are powered by blockchain technology — a decentralised, distributed, and utterly immutable ledger — they are transparent and trackable that can’t be altered or removed by any third party like a government or bank.
Hundreds of thousands of crypto transactions happen every day, and believe it or not, the highly advanced technology of blockchain allows all of them to be recorded and anonymously viewable by anyone. Although the crypto address, private and public keys are featured in text strings, no user would want any form of their identity to be seen by the prying eyes and mischief of hackers. This is where privacy coins crypto come into play.
What are privacy coins?
Crypto privacy coins have privacy-enhanced features that obfuscate transactions on their blockchain networks, thus keeping your identity and activities anonymous, private, and overall safe. Only people involved in a transaction are given access to know the amount transacted.
How do privacy coins work?
Privacy tokens work differently, but their designs generally enable privacy in one of two ways. First is those that emphasise anonymity by concealing the names of those involved in transactions. Second is those that focus on being untraceable that will make it impossible for hackers or computers to follow a transaction trail. Understanding how each functions and relies on several various strategies require knowing first which are the current best privacy coins in the market.
What are the misconceptions about privacy coins?
Just like with most digital currencies experiencing criticisms due to their volatile nature, privacy tokens crypto are becoming a more pervasive and often contentious topic due to the misconceptions of enabling illicit and illegal activities. This is the reason why apart from banning exchanges that accept them, financial regulators have become more persistent in using AML (Anti-Money Laundering) and KYC (Know Your Customer) requirements.
What curious crypto users and critics don’t know is that privacy coins were and are being developed just for that purpose: to provide maximum privacy for financial transactions. They are an excellent choice for people and companies alike that care about their safety and security in a robust and decentralised manner. This is especially true for conglomerates that may have trade secrets or a list of clients and suppliers they want to be hidden and protected from hackers, as well as to people who reside in countries with restricted economic freedom who want to protect their assets.
What other benefits do privacy coins come with?
High user security may be privacy coins’ biggest asset, but other benefits that will further improve your portfolio are their full fungibility and continuous mounting popularity despite criticisms.
Fungibility refers to the ability of two or more assets or commodities of the same kind to be exchanged without losing quality, thus retaining both value and utility. Several bars of gold of identical weight are often the best examples, whereas both fiat money and digital currencies are not because of the likelihood of tracing their transaction histories.
Privacy coins are entirely different because they are equal and fungible by default, thereby making them a much safer investment. Their transaction histories are not recorded in any form on their networks, which is even more advantageous because it frees you of worries and any liability for using ‘tainted’ coins should they have been involved in illegal activities.
While it is true that privacy coins have gained an unfavourable reputation, research and trends deem otherwise as they only continue to grow in popularity and value. The increasing demand for secure and private finances has led many legitimate people and companies around the world to consider using and investing in them. One way or another, they are here to stay in the market. The question is, what are the top privacy tokens that are worth the investment?
What are the top 3 privacy coins?
Privacy coins are soaring today. As of mid-April 2022 in CoinMarketCap, their market cap and trading volume are valued at $11.909 billion and $1 billion, respectively. Here we share with you the top three tokens in the privacy coins list.
Monero (XMR)
- Coin price → $236.06
- Market cap → $4.25 billion
Monero is quite challenging to trace because it uses ring signatures and stealth addresses. The former is a sort of digital signature that ensures total anonymity and resistance to cooperation, whereas the latter works by requiring the sender to use a one-time address for each transaction.
Zcash (ZEC)
- Coin price → $145.99
- Market cap → $2.06billion
Zcash calls itself ‘If Bitcoin is like HTTP for money, Zcash is HTTPS’ due to its enhanced security and privacy features. It ensures you financial anonymity through its own cryptographic technique called Zero-Knowledge Proof, which allows you to hide all of your transactions from other users like your addresses and total amount.
Dash (DASH)
- Coin price → $102.63
- Market cap → $1 billion
DASH, like Zcash, gives you financial privacy by allowing you to choose whether or not to hide your transactions through its PrivateSend function. This is done by combining the protocols of master nodes, which are creative decentralised network servers. The said feature also allows you to hide the sources of your payments. Only that, it will likely increase your transaction fees.
Should you use privacy coins?
The saying ‘to each his own’ is quite prevalent in the crypto world. Its highly volatile nature, for one, is already a big argument among enthusiasts and critics. As for privacy coins that are harder to regulate due to their misconception of being used in criminal activities, they are highly suggested if you are after adding another layer of anonymity and privacy.
Privacy coins are recommended because their true purpose is to provide more transactional privacy in a fast-paced emerging digital economy, at least more than mainstream digital currencies like Bitcoin and Ethereum.
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Words: Antoinette Laraze
