Cryptocurrencies are gaining increasing popularity, and with them comes the question of transaction privacy. Are virtual currencies really anonymous, or are our data recorded somewhere? In this article, we will look at technologies that aim to protect the privacy of cryptocurrency users, allowing them to take advantage of the benefits of virtual money without fear of violating their anonymity.
Cryptocurrencies, like Bitcoin, have gained popularity due to the promise of decentralization and independence from financial institutions. However, the issue of privacy still raises many doubts. Although some cryptocurrencies offer a certain level of privacy, they are not completely anonymous. In response to the growing demand for greater privacy protection, anonymous cryptocurrencies have been created, which use various technologies to hide the identity of transaction participants. Let’s take a closer look at three of them: zk-SNARKs, Ring Signatures, and CoinJoin.
1. zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge)
zk-SNARKs technology allows you to confirm the truth of information without having to disclose it. In practice, this means that transaction participants can prove that they have sufficient funds to carry out the transaction, without disclosing the exact amount or personal data. Zcash is one of the projects that uses this technology, providing its users with a higher level of privacy.
In addition to Zcash, zk-SNARKs technology is also used in other projects, such as Coda Protocol, which aim to achieve high privacy and scalability. It is worth adding that zk-SNARKs are one of many approaches to so-called. zero-knowledge (Zero-Knowledge Proofs), which were developed to ensure privacy. Another example is zk-STARKs, which, despite the similarity of the name, is based on different cryptographic assumptions.
Interesting links for further reading about zk-SNARKs:
Coda Protocol: https://codaprotocol.com/
Comparison of zk-SNARKs and zk-STARKs: https://medium.com/starkware/zk-starks-create-verifiable-trust-even-against-quantum-computers-dd9c6a2bb13d
2. Ring Signatures
Ring Signatures is a technology based on cryptography, which allows a group of participants, each having their own private key, to sign transactions. As a result, it cannot be determined which of the participants actually made the transaction. Monero, one of the most anonymous cryptocurrencies, uses this technology to protect the privacy of its users.
Ring Signatures technology was developed in 2001 by a group of scientists, including Ronald L. Rivest, the creator of the RSA algorithm. In cryptocurrencies, in addition to Monero, ring signatures are also used by other projects, such as Particl or Bytecoin. It is also worth mentioning variants of this technology, such as RingCT (Ring Confidential Transactions), which additionally hide transaction amounts.
Interesting links for further reading on Ring Signatures:
The original scientific paper on Ring Signatures: https://people.csail.mit.edu/rivest/pubs/RST01.pdf
CoinJoin is a method of combining multiple transactions into one to make it difficult to link sender addresses with recipient addresses. In practice, participants jointly create a transaction that contains many inputs and outputs, and then sign it before it is sent to the network. This makes it harder to trace the transaction path and discover the identity of the participants. Bitcoin, although not anonymous in itself, can use this technology through dedicated services such as Wasabi Wallet or JoinMarket.
The CoinJoin idea was first proposed by Greg Maxwell, one of the main Bitcoin developers, in 2013. Since then, many implementations of this idea have emerged, and some of them, like TumbleBit, further increase the level of privacy by applying mixing techniques. It is worth noting that CoinJoin is not built into the Bitcoin protocol but can be used as an additional service by people interested in increasing the privacy of their transactions.
Interesting links for further reading on CoinJoin:
Wasabi Wallet: https://wasabiwallet.io/
An introduction to CoinJoin by Greg Maxwell: https://bitcointalk.org/index.php?topic=279249.0
It’s also worth paying attention to other technologies and approaches that can affect privacy in cryptocurrencies, such as Dandelion or Mimblewimble.
Dandelion is a protocol aimed at enhancing the privacy of information transmission in cryptocurrency networks. Operating at the network level, Dandelion changes the way transactions are broadcast, making it difficult to link IP addresses to specific transactions. The introduction of this protocol can complement other privacy-enhancing technologies such as zk-SNARKs or Ring Signatures.
Interesting links for further reading on Dandelion:
Dandelion in Grin (cryptocurrency based on Mimblewimble): https://grin.mw/
Mimblewimble is a cryptographic protocol that combines various privacy and scalability technologies. Its name comes from the Harry Potter book series, and the protocol was first described in an anonymous document in 2016. Mimblewimble allows for increased transaction privacy by combining multiple transactions into one and removing unnecessary data from the blockchain. The two most well-known cryptocurrencies based on the Mimblewimble protocol are Grin and Beam.
Interesting links for further reading on Mimblewimble:
The original Mimblewimble whitepaper: https://download.wpsoftware.net/bitcoin/wizardry/mimblewimble.pdf
It’s worth noting that while the above technologies significantly increase the level of privacy in cryptocurrencies, they do not guarantee full anonymity. All transactions in the cryptocurrency network are still recorded on a publicly accessible ledger (blockchain), meaning they can be subjected to analysis. For instance, experts in network analysis can track the flow of funds and try to associate transactions with specific addresses.
Despite these limitations, anonymous cryptocurrencies represent an important tool for those wishing to maintain the privacy of their transactions. It is essential, however, that users are aware of the existing risks and potential legal consequences. Some countries, such as Japan, are starting to regulate the use of anonymous cryptocurrencies, fearing they could be used for illegal purposes, such as money laundering or financing terrorism.
In conclusion, technologies like zk-SNARKs, Ring Signatures, and CoinJoin allow for increased privacy in cryptocurrencies, protecting transaction participants from unwanted scrutiny of their finances. Although they do not offer full anonymity, they nevertheless represent a step towards greater privacy protection in the world of digital currencies. To use these technologies responsibly, it’s worth staying up-to-date with legal regulations and taking care of your online security.