Aleph Zero Blog

The Evolution of Privacy Coins

Sep 7, 2023

There’s a lot of open source development in web3. The space benefits greatly from a fast and integrated iterative process where old and new technologies can be quickly applied to use cases — one of these being financial privacy.

As we saw, zero knowledge technology has been around for a while. There’s been experimentation with different applications of this technology for the enhancing of individual privacy since the 80’s. 

One of the areas of experimentation that has been close to blockchains and web3 is the invention and evolution of privacy coins. Let’s take a look at how privacy coins started, where they’re at, and what might be their future.

Before we jump in further–as privacy coins are an important piece of the general crypto landscape, Aleph Zero is not one of them. As a network, Aleph Zero is an evolution to that approach that aims to remain compliant with regulations across multiple jurisdictions. The network, as a layer 1 smart contract platform, is open and transparent. What it offers is an optional privacy enhancement through Liminal, which has built-in fraud-protection mechanisms.

What Are Privacy Coins?

Privacy coins are a category of cryptocurrencies that prioritize privacy and anonymity features in their design and functionality. These coins aim to provide users with the ability to conduct transactions and interact on the blockchain while maintaining a high level of privacy compared to traditional transparent blockchains like Bitcoin or Ethereum.

The term privacy coins is therefore related to blockchains that by all means make all the transactions private, where users and monitoring services wouldn’t be able to discover the parties or amounts transferred on-chain, although the specifics of each privacy coin can be different.

The History of Privacy Coins

The concept of privacy coins emerged as a response to the transparency and traceability of transactions on Bitcoin’s blockchain. Although often misunderstood as a privacy coin, Bitcoin’s wallet system is technically pseudonymous. Individuals can transact under the guise of a public key that can in fact be used to trace the identity of its holders.

In order to solve this issue, developers in the early cryptocurrency community worked on different privacy mechanisms like mixing services, and more notably, privacy coins.

The Early Days

In 2012, Bytecoin, often considered the first privacy coin, introduced CryptoNote technology. This offered enhanced privacy features like ring signatures (a technique for transaction mixing) and one-time addresses. However, Bytecoin’s launch was clouded by suspicions of pre-mining, leading to skepticism and a lack of adoption.

Rise of Monero

Monero (XMR) then emerged in April 2014 as a fork of Bytecoin with transparent origins and a strong focus on privacy. Leveraging CryptoNote technology, Monero introduced ring signatures, stealth addresses, and a unique feature called “Ring Confidential Transactions” (RingCT) to obscure transaction amounts. 

These innovations propelled Monero into the spotlight, and it became synonymous with privacy coins. Its success even prompted the IRS to offer two $625,000 contracts with hopes of “cracking” its privacy features.

Zcash and zk-SNARKs

In late 2016, Zcash (ZEC) was launched, introducing a novel privacy technology called zk SNARKs. This was an offshoot of the original ZKP idea that had been iterated over at MIT and found its first implementation in the Zcash protocol.

Zk SNARKs allowed users to prove the validity of transactions without revealing any transaction details. Zcash provided users with the option to send shielded or transparent transactions, enabling selective privacy. 

However, the use of zk-SNARKs required significant computational resources, raising concerns about accessibility and centralization. They presented the need for a trusted setup, a process of generating initial parameters or cryptographic keys in a way that requires a level of trust in certain individuals or entities.

Other Efforts

Privacy coin development continued with projects like Dash (DASH), introducing optional privacy features alongside its regular transactions. Dash’s PrivateSend utilized CoinJoin to mix transactions, enhancing privacy for users who opted for it. 

Other projects like PIVX, Verge (XVG), and NavCoin also entered the scene, experimenting with various privacy-enhancing mechanisms.

Where Privacy Coins Are Going

Privacy coins are currently getting bad press due to the system’s inability to distinguish honest, average user from an adversary using these coins for illicit activities. Even if no such activity can be found there, the network is designed in a way that doesn’t allow to easily prove that.

Answering this problem is the key to on-chain privacy moving forward. The privacy-focused community has only two ways forward. Either balancing the transparency and privacy in a way that satisfies both the users and regulators, mainly through introducing mechanisms that allow for transaction reveals at the user’s consent–or accepting the risks of full privacy.

In Aleph Zero, we believe that privacy is a human right. It’s not about the choice on what to hide–it’s about having the option to reveal what we agree to, something we all have in the real world. The regulator’s concerns are valid–we just need to work together–the projects and governments–to establish the right approach to recreating the real world setting on blockchains.

Therefore, what is the way forward for privacy coins? It’s rather making them privacy-enhancing blockchains, with the privacy being optional. This is the route Aleph Zero follows.

Tune in to the Aleph Zero podcast to go in-depth and learn more about on-chain privacy and privacy-preserving blockchains. Join the Aleph Zero community for updates on the latest developments on web3 privacy.