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What are anonymous cryptocurrencies and how do they work

The attractiveness of cryptocurrencies is largely explained by their anonymity. Initially, Bitcoin positioned itself as an anonymous cryptocurrency. A transaction can be made without indicating personal data. But this is pseudo-anonymity. Due to an open blockchain any transaction can be tracked. Also, possibly find out the amount of transaction and account funds. This can be done by secret service, hackers and even ordinary users. Due to the rules established on large exchanges, many bitcoin addresses can be associated with real personalities.

the man in mask and his hand in the foreground

The CryptoLux development team conducted explore Bitcoin network transactions anonymity. They claim it is possible to deanonymize up to 60% of addresses. Bitfury experts said they could reveal more than 16% of all Bitcoin addresses owners and more. Even TOR network using cannot guarantee confidentiality.

The lack of complete confidentiality has caused many developers to think about developing truly anonymous cryptocurrencies that allow users to maintain the largest privacy.

A high level of privacy achieved through the use of Cryptographic protocol. This complicates or makes it completely impossible to track blockchain transactions.

Anonymous cryptocurrencies – good or evil? Security or lawlessness?

Privacy provides many benefits: avoiding of targeted advertising, no personal interests and preferences data transfer, no crimes against individuals with large sums of cryptocurrencies, as now it is possible to find out the Bitcoin wallet balance.

Urprisingly, after anonymous coins appearance, fraudulent attacks and financial frauds numbers increased. They are for example, ​​illegal things sale and development of malware. Attackers hide the movement of stolen funds. They demand to make a ransom in bitcoins, and then convert it into another anonymous cryptocurrency. In this way, the WannaСry virus developers went. Some countries, such as Japan, have banned anonymous cryptocurrencies on exchanges.

Today there are more than 10 anonymous cryptocurrencies with different user privacy protecting methods. Monero, Dash and ZCash today are the largest private digital currencies by market capitalization.

  1. Monero (XMR)

    Due to the use of complex cryptographic methods, the coin is considered the most anonymous. But this leads to redundancy size of a transaction. They are 50 times more than Bitcoin.

    The special structure of the blockchain isnbased on the cryptographic protocol CryptoNote, which allows hiding the sender address, recipient and the transaction sum.

    The system uses a complex on-chain cryptographic, such as Ring signatures, RingCT, Kovri, and Stealth addresses. According to a protocol, transactions signed immediately by a group of users, not by one person. Thus, it is impossible to calculate who exactly made the transfer. One-time stealth addresses are generated for each transaction.

  2. Zcash (ZEC)

    Is used to anonymize users of the zk-SNARK protocol. This algorithm provides confirmation of the authenticity of information without revealing it. It is known as Zero-knowledge proof.

    Secure transactions require using more powerful equipment. This entails commission fees increase. Therefore, anonymous and public transactions in the Zcash network are operating at the same time. It is planned to switch to an anonymous system completely in the future.

  3. Dash (DASH)

    User data here are hidden through the PrivateSend system with a two-level blockchain system; masternodes are also used. The reward is divided between users and miners equally.

    Anonymous transaction scheme is as follows. The user sends a request to masternodes. After reaching n-number of transactions, the coin is crushed into small pieces. Then they are mixed several times. Coin is mixed in few stages by randomly selected masternodes. Only then they send money to the final recipient. This shuffling makes connection tracking between transaction sender and receiver impossible.

  4. Verge (XVG)

    Verge uses Tor and I2P networks to anonymize. This is a distinctive feature of the competition data hiding mechanism. The currency has an ambiguous reputation due to cooperation with the PornHub website. A transaction can go through an open blockchain using the Wraith protocol. Using Tor provides a private connection to the blockchain. Address gets anonymized with additional IP hiding by Monero principle.

  5. Bytecoin (BCN)

    It uses the cryptographic protocol CryptoNote, which was developed back in 2012. Many consider it being the first anonymous cryptocurrency. Like Monero, anonymity of transactions is achieved through using the unique, one-time public address for each transaction. Bytecoin is considered one of the first currencies that gave impetus to the development of a whole direction in cryptocurrency technology.

  6. Bitcoin Private (BTCP)

    It combines Bitcoin security level and the anonymization of Zcash. This cryptocurrency was born as a result of a forked merge of Bitcoin and Zclassic. The developers goals was to create a cryptocurrency that combines the two digital coins’ advantages at once. Transactions anonymization, as in ZCash, works on the Zero-knowledge proof protocol principle. The difference is that the founder does not receive a reward.

  7. SmartCash (SMART)

    This is a relatively new cryptocurrency. Appeared as a result of the Zcoin network hard fork. Anonymization is achieved by using an innovative SMART PRIVACY technology. To hide the input and output connection between coins on user’s wallet, it is possible to “burn” coins and get the same amount of clear money. A small commission is taken for this service.

  8. Zcoin (XZC)

    It is powered by Zerocoin Protocol. To anonymize the transaction, burning coins principle is applied. When making a transaction, the wallet receives a similar number of new Zcoin coins without transaction history.

  9. NavCoin (NAV)

    To provide anonymity, the system uses a complex method for entangling sub-chain of main blockchain tracks. It does not use cryptographic methods. A transaction initially is routed to a sub-chain of the NavTech blockchain. After that, it encrypts falling into the pool from many servers. Only then it is sent to the final recipient.

  10. Horizen (ZEN)

    Formerly it was ZenCash. Fork of Zclassic, which is also a decentralized content sharing platform. Transaction privacy, anonymity, and safety is achieved through the use of zk-SNARKS, TLS integration protocols. Users are allowed to select desired level for their digital assets.

Despite the fact that Bitcoin isn’t a completely anonymous cryptocurrency, there are services which allow to save confidentiality.
For example, those are anonymous BTC mixers called or Bitcoin Fog. User actions are not recorded and are not stored on servers. As soon as the coins’ owner completes the operation, all information is deleted. It can be called “bitcoins laundering”. Instead of coins with history, the client receives pure Bitcoins from the reserve.

In the modern world, where the personal users’ data can be transmitted without consent to it, anonymous cryptocurrencies become a real salvation. This is a popular means of protecting personal life and savings. We have described only the most popular anonymous cryptocurrencies. With the increase of personal life attacks, the list of anonymous cryptocurrencies only grows. Some experts believe anonymous cryptocurrencies will become world’s main currency.

date of publication icon 11 Jul 2019 icon of time needed to read the article 3 min read