What Are Privacy Coins And How Do They Work?

Ever since the dawn of finance and investment, the ultimate goal of any given investor out there has been to increase their wealth by subjecting it too intricate and tangible measures or schemes which propose a fewer extent of risk.

The concept of decentralization, and especially blockchain technology, has added value to this earlier concept by making things a bit more intangible and in a strictly digital space.

Bitcoin or any other cryptocurrency that you come across are highly intangible, which means that they do not have a physical existence and only exist through the blockchain, which sustains their function, which means entirely on the Internet in a distributed fashion over multiple ledgers across the world.

Importance of Privacy in the Crypto Sector

What’s yet another promising aspect of cryptocurrency is its privacy and the sense of anonymity that it lends to the user. You do not have to publish your financial attributes associated with cryptocurrencies anywhere if you do not want to, and all the information will remain anonymous, of course, because none of it is sanctioned or overseen by any government official or regulatory oversight whatsoever.

But still, most of the information is made public by blockchain technology which sustains a typical cryptocurrency in its ecosystem.

Now sensitive data such as your name or the person to whom you have transacted a dedicated amount of crypto does not become available in a public fashion, but the amount of money that you have sent or other such information regarding the platform which was used for the transaction may get out there in public.

Many investors strictly want to keep their identity anonymous at every cost or kind of threatened by this attribute of decentralization and blockchain technology.

Lucky for them, privacy coins are the solution to this obscure problem; not only you can convert your crypto say Bitcoin or Ether, into a private coin of your choosing which means that neither your information which is personal such as your name and address, nor the platform that you’re using for the sake of engaging in a transaction would be revealed.

What are Privacy Coins?

Any and every crypto token which works on the same principles of blockchain technology and decentralization while adding an additional layer of security to a previously conceived array of encryption and having customized services offered to the user in terms of security is known as a privacy coin.

So, in a sense, the basic working of a privacy coin remains the same as any cryptocurrency out there. You can use them for transactions, you can store them in a wallet of your choosing et cetera, but all of that is taking place with an additional layer of security entitled to the user for which the privacy coin was constructed in the first place.

The private information of the users engaged in a transaction that was conceived and orchestrated by a privacy coin would remain completely anonymous.

Additionally to this, the amount which was transacted over the medium or the service which was used for the transaction would also remain redacted from public records, which actually makes these privacy coins their money’s worth.

Use Cases of Privacy Coins

Supposedly, if you are running a business and you are paying your vendors and everyone in the form of cryptocurrencies, and you do not have privacy coins engaged in the transaction, then there are some fatal drawbacks that you’re going to experience.

First of all, everyone involved in the transaction is going to know the exact balance that you have at hand for a particular cryptocurrency, and that quickly takes away your bargaining edge from the vendors, but with privacy coins, no one is going to know your business, and you are going to have all the credibility as well as in negotiating edge.

If someone else was using your crypto wallet for the sake of making transactions and they engaged in something illegal or shady that you were not aware of, then it can get really dark for you if an investigation were to start.

With the help of privacy coins, you would be able to mask your steps, and no one would be able to backtrack your transactions to a particular illegal activity, thus saving you from the trouble of getting under the microscope of authorities or regulatory carnage.

If you see something on the Internet, such as you want to buy in new beer off earbuds, and you’re searching for it on the Internet then suddenly you’re going to see ads pop up at every social media outlet of the earbuds that you were previously searching for.

The same thing happens with sites you buy stuff from; if they have access to your transaction history or the amount of money that you have spent, then in the future, they could adjust the price of their goods in accordance with your purchasing habit, and you would end up paying more money than you originally should.

Having privacy coins on your side allows you to dodge that shady business, and no one is ever going to know how much coins or money you originally spent on their site, and you would be all in the clear.

Pros and Cons of Privacy Coins

When you are engaging with physical or Fiat Zcash you have the notion of fungibility with you. Any dollar bill that you have ever spent is just as good as any other dollar bill, and there is nothing to it, and that right there is known as a measure of fungibility.

But in the digital role, not every crypto token that you have spent is the same when compared to another token of the same descent. This is where having a privacy coin actually comes to your aid.

It provides you with the same notion of fungibility as physical or Fiat Zcash would, and that is really an interesting aspect of engaging with privacy coins.

On the other hand, this also means that when no one is able to backtrack your transactions, then possibly enough, you can use these privacy coins for illicit activities; the intent is what matters here.

Not everyone would want to enable or utilize the dark side of these privacy coins, but given a chance, there are many people in the world who would use these tokens or coins for their illicit purposes.

They would use these tokens for laundering money from one place to another or paying off illicit or illegal activities on the Internet. So everything that you engage with has a positive and negative side; you are going to decide which side you want to stick with.

Another thing that should be made clear here is the fact that these privacy coins are not accredited nor backed up by any regulatory authority in the world. This is one of the reasons why you won’t be able to trade in or purchase these privacy coins off of well-enabled crypto platforms out there, such as Coinbase or Binance.

They won’t sell these tokens to you or anyone else for that matter because these have illegal or illicit propaganda to them, and since the intent of the person who wants to buy these tokens cannot be known for sure, these tokens are not available on these platforms at all.

How do Privacy Coins Work?

The main idea behind the working of privacy tokens or coins includes heavy encryption of all the data which pertains to a specific transaction or the user for whom the transaction was actually carried out.

To be able to better understand the official working principle of a private token or coin, it is essential to dissect or even divide the process into its consecutive individual parts, which would make it extremely easier for the end user to comprehend the topic at hand.

The first thing that you need to do is to make a decision about whichever private equity you have to use, and then you would have to set up yourself or their platform in order to send or receive payments in your preferable crypto token. So when you have decided to move with a particular privacy coin, you just hover over to their entitled app or website and register yourself, which officially includes linking that specific privacy coin with your original crypto wallet.

You’d have to share the information of your present crypto wallet with that of the privacy coin app or website because otherwise, it is not going to work.

Do not worry because all the information that you put there is not going to be made public at any cost; all your data is safe and secure, and once you have done that, you will be able to send and receive payments in a strictly anonymous fashion.

Privacy Coins Introduce Double Encryption

As stated earlier, the only thing that these privacy coins or tokens are doing differently than the crypto tokens out there is to impose further layers of encryption onto your transactional data and make it extremely hard for anyone to crack these open for the sake of viewing your personal information linked to that particular transaction.

So, when you initiate a request to either receive or send money using your privacy coin, it roots directly to the blockchain of whatever crypto token that you have selected as a mode of payment or have included in your request to receive a payment.

This standard inoculation of the blockchain-oriented topology applies here, which means that the standard encryption protocol that is followed by a particular crypto token is going to be followed exactly to the dot here.

Now when the official or standard encryption protocols have been put into place, the privacy coin gets to work to add an additional layer of encryption on top of the official encryption layer proposed by the blockchain network which you are presently using.

It will redact the amount of token which was transacted in this particular transaction along with any aliases, addresses, or anything that can link the transaction to you or any other person who was involved in it.

And all of that information has been redacted, and additional layers of encryption have been stopped over the transaction data; you get an extremely Immaculate and ironclad transaction that serves your privacy.

Redaction of Private and Public Addresses

Last but not least, the privacy coin that you are using for the sake of engaging in a private transaction is going to take hold of your private as well as the public addresses for the transaction.

It means that only you or the administrator of the transaction will be able to view or speculate these addresses, and these will not be made public under any given circumstances.

In a general sense of the word, you can assume that these addresses will be skimped off from every public record, and only the administrator of the transaction or the user who orchestrated the transaction would be able to view these addresses.

It means that neither anyone in a public capacity nor the law or regulatory authorities out there would be able to backtrack this transaction to you, making every last bit of money that you spend on the service worth it.

Two Most Private Cryptocurrencies

Monero

Monero is the most subtle private coin out there, which you can use for the sake of initiating private transactions. It has an identical working principle to that of Bitcoin, which means that it works on a proof of work algorithm here; the data corresponding to a particular transaction has to be checked across the entirety of the mining functions spread across the world.

Each and every transaction that has to be orchestrated or initiated must be checked by all the miners to make sure that it is authentic and has been initiated by an authentic user, and is not a computer program trying to execute its own agenda over the blockchain environment.

The signing of each and every transaction takes place in an extremely complex environment which is otherwise known as the ring signature. Whenever a transaction is subjected to a particular block or the blockchain, it needs to have the signature of the executor of that transaction.

Every other token out there, such as Bitcoin, Ether, or XRP, has only one signature allocated per transaction, which means that it can be backtracked to that particular person.

In the case of Monero, every transaction has multiple digital signers, which means that only one of them was the authentic or legit executor of the transaction, and everyone else was essentially a decoy making it impossible to backtrack the transaction to a single person or entity.

Zcash

Zcash utilizes the same algorithm as well as other essential systems in terms of decentralization as that of Bitcoin, which means that it also uses a proof of work-based consensus algorithm. The privacy-oriented features of Zcash are extremely sophisticated and advanced as compared to Monero.

Where Monero imposes multiple signatures that confirm the occurrence of a transaction and tricks the system into believing that any one of these signatures could be the authentic executor of the transaction, but it doesn’t say which one, thus masking the privacy of the original user immaculately.

Zcash goes one step ahead by generating a specific zk-SNARK key Using zero-knowledge cryptography, which only confirms that the specific transaction indeed did take place, but it says nothing about the participants of the transaction, date and time, or the amount transacted, let alone the public or private addresses for the set transaction.

It is much more sophisticated and has a higher privacy focus execution as compared to Monero.

The most elegant aspect of Zcash is that it allows the user to select if they want to keep their transaction private or if they are alright with sending or initiating the transaction, just as in normal Bitcoin transactions with public and private addresses and everything else thrown into the mix.

So whenever you originally or officially want to hide your identity, you can choose the option to mask your privacy with the help of Zcash, unlike Monero, which provides it as an autonomous feature, not asking the user if they want to actually hide their transactional data or not.

Final Thoughts

The process of engaging with a privacy coin, masking it with the original crypto which you intend to use for the transaction, and going through the additional process of adding encryption is a lot of work.

But it is worth it if the ultimate agenda is to wipe away every assay of your digital footprint from the blockchain environment where you are executing the transaction in. These privacy coins can help you big time to add layers and layers of encryption and to make sure that every transaction you engage in is as safe as it can be.