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Privacy

Privacy-focused networks

Privacy by design, not as an add-on

The privacy solutions mentioned before, such as the coin mixers that we covered in the previous lesson, are still far from ideal. After all, when the transaction is made, the wallets are still only pseudonymous, and even though it’s impossible to link a specific input to a specific output, it’s still possible to see that a particular wallet interacted with a coin mixing service (and this itself could be made illegal).

That’s why some blockchains take the matter of privacy much further by integrating it into the basic architecture of the blockchain, obviating the need for later add-ons such as coin mixers. In this lesson, we’ll look at three such blockchains: Monero, Zcash and Pirate Chain. Of course, there are many more privacy-focused projects out there, but these three offer a great starting point when talking about this topic.

Monero

Monero was founded in 2014, and it has its origins in the CryptoNote protocol which was implemented in 2012. The way that the protocol works is by utilizing stealth addresses and ring signatures. Stealth addresses enable users to receive transactions without anyone else being able to see to whom the transactions were sent. The recipient needs to actively scan the network with their private key to find the transactions that were sent to them.

What’s more, ring signatures mean that the sender of the transaction is also hidden: when someone sends a transaction, they choose several other random users’ funds to also appear in the transaction as possible senders. This way, no one else can determine which of the potential senders actually sent the coins.

Ring signatures make the Monero network comparable to a blockchain that has coin mixing enabled by default, and it’s also worth noting that this makes all transactions equally private and equally shielded from suspicion. On a blockchain such as Bitcoin, interacting with a coin mixer can be considered money laundering, and users can unknowingly buy coins that have been blacklisted due to previous activity. On Monero and the other networks mentioned here, all transactions are private, meaning that no individual transactions can stand out.

Zcash

Zcash, founded in 2016, uses a different mechanism called zk-SNARKs (zero-knowledge succinct non-interactive arguments of knowledge), which are a type of zero-knowledge proofs. In general, a zero-knowledge proof is a way for one party to prove to another party that they know a particular fact without revealing that fact. This can be done by means of a hash, i.e. a one-way cryptographical function that gives a specific encrypted output from an arbitrary input (and the same input always produces the same output), while it isn’t possible to go back from the output to the input except by a brute force attack.

That way, one party can reveal the hash of a particular piece of data to the other party, which can then check if the hash is correct, whereas no one can reverse the function to obtain the original data from the hash. Hashes are used in all blockchains, including Bitcoin, but for different purposes that have to do with the consensus algorithm, i.e. the underlying mechanism by which the blockchain works, rather than the information that is stored on it.

Where Zcash differs is that it uses hashes of the transaction data itself,and their zk-SNARKs provide stronger untraceability than the ring signatures of Monero. However, one problem is that the privacy of Zcash is largely optional, as users can decide whether they want to send transactions from transparent or shielded addresses.

Pirate Chain

Pirate chain, founded in 2018, also utilizes zk-SNARKs similarly to Zcash, but it makes privacy universal by only allowing shielded transactions, which makes the entire network more impervious to any attempts to trace transactions.

What’s more, Pirate Chain implements dPoW (delayed Proof-of-Work), a mechanism that “notarizes” all the transactions on Pirate Chain to the Bitcoin and Komodo blockchains. This means that, in order to execute an attack and compromise the network, an attacker would need to overcome the combined hash power of the Pirate Chain, Komodo, and Bitcoin blockchains, making Pirate Chain even more secure than the Bitcoin network itself.

Another difference between Pirate Chain and Zcash is the token distribution and issuance. Unlike Zcash, Pirate Chain doesn’t have any “dev tax” that is allocated to the team, or a premine. Apart from the fair distribution, the issuance of the tokens is rapidly decreasing, with 90% of the total supply already mined. New tokens will continue to be mined at ever slower rates until the maximum supply of 200 million tokens is reached.