Privacy coins, also known as anonymous or fungible coins, are a type of cryptocurrency that prioritize the privacy and anonymity of their users. These coins use various methods like stealth addresses and ring signatures to conceal the identity of the sender and receiver in transactions. But can they get mass adoption? Let’s figure this out!
Privacy in a Nutshell
The growing popularity of privacy coins is backed by the increasing concern over the lack of privacy in the traditional financial system. With the advent of blockchain technology, privacy coins offer a way for individuals to take control of their financial data and transactions. They enable users to make transactions without revealing their identity, allowing them to maintain a high level of privacy and security.
Some of the most popular privacy coins include Monero, Zcash, and Dash. Monero, in particular, has become one of the most widely used privacy coins due to its advanced anonymity features and robust network. Monero uses ring signatures and stealth addresses to conceal the identities in transactions, making it one of the most secure and private cryptocurrencies available. Zcash, on the other hand, uses a technique called zk-SNARKs to conceal the transaction details, while Dash uses a technique called CoinJoin to mix transaction inputs and outputs, making it difficult to trace the origins.
Of course, such types of cryptocurrencies attract the attention of regulators who seem to be fighting it with all their power. Not long ago, the US Treasury Department took action against a specific technology, known as Tornado Cash, that allowed for anonymous cryptocurrency transactions. The Treasury blocked access to Tornado Cash and banned U.S. citizens from using it in the future. This is a significant move as it targets the technology behind privacy coins rather than the coins themselves. This action implies that the government sees a potential for criminal activities associated with the use of Tornado Cash such as money laundering and cybercrime.
Implementing privacy features in crypto projects, including exchanges and wallets, can be costly and challenging. Features require additional resources and technical expertise to deploy, which can increase the overall cost of the project.For example, Monero's ring signatures and stealth addresses require a high level of computational power to verify transactions, which can be costly to support. Additionally, implementing privacy features in smart contracts can also be complex, as it requires a significant amount of coding and technical expertise to execute.
Despite the benefits of privacy coins, they may not be the best fit for Web 3.0 either. The decentralized nature of the web relies on transparency and accountability, which can conflict with the anonymity provided by these coins. In a decentralized system, every user is a stakeholder, and they have a right to know who they are interacting with and what actions are being taken on the network. Privacy coins, on the other hand, obscure the identity of the users, making it difficult to hold them accountable for their actions.
We can name at least 4 more reasons why privacy coins are not in great demand.
- Most people don't want to transact. People may want their money to be private, but they don't necessarily want to pay each other in special coins that are only defined by their ability to provide anonymity.
- Privacy is not yet easy to use. The history of HTTPS, the encrypted protocol used to access almost all websites, teaches us that people will only choose privacy when it's easy. In contrast, privacy coins like Monero and Zcash require technical sophistication and impose high friction to protect one's privacy.
- Most people don't care about privacy. People use social media apps that openly sell data to third parties, use Venmo and publicly broadcast their payments, and use SMS which is stored in plaintext and can be subpoenaed by law enforcement. Despite a parade of massive scandals, social media use has never been higher. Privacy is a public good, and the iron rule of economics is that public goods are undersupplied by free markets.
- They are often the first target for regulatory inquisitions. Governments are continually trying to tighten the noose on privacy coins, and regulators have been delisting privacy coins in South Korea, Japan, the UK, and the US. Cryptocurrency lobbies have grown larger, but very few institutions are willing to come to the defense of privacy coins.
Things aren’t that bad as this type of crypto still has some use cases.
Advantages and Prospects
Privacy coins are well suited for large money transfers, where the need for privacy is paramount. For example, these cryptocurrencies can be used by businesses to make anonymous payments to their suppliers or employees, without revealing sensitive financial information. Similarly, they can be used by individuals to make large purchases, such as buying a house, without revealing their identity.
Despite the limitations, privacy coins will most likely occupy a specific niche in the future. As more people become concerned about privacy and security, the demand for privacy coins is likely to increase. Additionally, privacy coins can play a significant role in protecting the financial privacy of individuals and businesses. They can be used in situations where privacy is of the utmost importance, such as in countries with strict privacy laws or where the government monitors financial transactions.
For NiftyPlanet, at this stage the choice is obvious - we do not work with private coins, but we have had an experience using them more than once. NiftyPlanet focuses on transparency and accountability, which may not align with the anonymity provided by privacy coins.
Privacy coins are a unique type of cryptocurrency that prioritize the anonymity of their users. They can be costly to implement and may not align with the decentralized nature of Web3. However, they are well suited for large money transfers and may have a specific niche in the future.