Anonymous cryptocurrencies and how much anonymous are they, Explained

What? How? Why?

Anonymous cryptocurrencies are peer-to-peer systems. They have own internal unit of account. The main goal of this type of cryptocurrencies is to provide complete privacy for transactions of money, which is done by cryptographic protocols. The use of last ones is aimed to make auditing of network data impossible.

History of Anonymous cryptocurrencies

When Satoshi Nakamoto created Bitcoin, he spoke highly of the potential of “digital, electronic cash”. But the first real use of them in the first period came to the online purchase of illegal goods. Of course, it later turned out that “fiat killer” is not really as anonymous, as we think. “Who is the sender”? The question can be answered by the following: “He can be traced by analyzing the transaction records”. So this is why anonymous crypto coins are becoming more and more popular.

What are the main disadvantages?

1. Developments in the field of web extensions and malware allow you to use the computing power of personal computers and mobile devices for mining anonymous cryptocurrencies. Some of these tools also cause significant damage to exploited devices.
2. Anonymous cryptocurrencies allow attackers whose aim are trading platforms or extort funds using specialized software to hide the movement of stolen money.
3. From the point of view of technology, criticism is mainly reduced to the size of anonymous transactions, which requires a large amount of memory from the full node, but constant updates, for example, Monero and ZCash, gradually solve this problem.

Stealth-address. What is it and how it works?

Stealth addresses are another completely standard way of hiding payments despite the fact that Blockchain is an open address database. Unlike CoinJoin and CoinShuffle, there is no entanglement here, here the concealment takes place on a completely different principle thanks to the Diffie-Hellman (Merkle) protocol.

The Diffie-Hellman protocol allows the parties to exchange data through a public channel for receiving, so-called shared secret, or “shared key”. Works as follows:

1. A person who wants to accept payments (the seller) creates a pair of keys: private d and public Q. Then Q can be communicated via public channels to those who want to make a payment (buyer) or simply publish it on their website. In the future, Q will not appear in any way in the Blockchain, and therefore there will be no trace of it.
2. The buyer also creates his own pair of keys: public P and private e. The received public key P is sent to the seller in the field of payment metadata.
3. Using the seller’s public key Q and its private key e, the buyer can obtain c - the common key. The seller performs similar manipulations with its private key and the buyer’s public key and receives the same c. From c, using the conversion, you can get the actual address of payment A (the buyer did this in paragraph 2). The payment address is random, provided that the buyer creates the keys at random. The address is known only to two parties.
4. The seller listens or scans the Blockchain for stealth payments and applies the transformations from clause 3 to each of them (or the buyer reports that the payment was made in some other way). If based on the metadata of a transaction and its own private key d, the seller managed to get the address and it coincided with the address of transaction A, then the seller can be sure that the payment has been made.
5. By combining c with his private key d, the seller can get a new private key giving him access to wallet A.

It is known that one of the easiest and most reliable ways to preserve the privacy of payments is to create new addresses for each new transaction - this should become a habit. But sometimes it is not convenient, for example, when you want to leave an address for donations unchanged and just wait for a surprise.

Ring-signatures

If you use only stealth-addresses, then the “seller” will still be able to find out when the funds arrived “at the recipient”. Here ring signatures come into play. In essence, ring signatures mix transactions in the Monero network. Each transaction randomly selects funds from other transactions in a single unit. Thus, no network user will be able to determine the real address of the source of the deal.

Anonymous cryptocoins

The number of anonymous coins is not as big, as usual ones, but the most widespread and perspective are considered Monero, Dash, Zcash, Bytecoin, Zcoin, Hshare/Hcash, PIVX, Bitcoin Private, Verge, Zcoin, Zencash, NavCoin, Zoin, BitcoinZ.

Listing all of them is a pointless and rather useless business, especially considering that new coins appear faster than you can manage to write about them. But, unfortunately, sometimes they disappear with the same fast speed, leaving people with a broken heart and an empty electronic account.

Let’s note a fairly large number of current currencies, which are forks. This is a pretty good experience because, in this way, you can use the experience and mistakes of previous versions, do not write code from scratch and improve it. There are cases when the coin was even created from the fork of the previous fork. There are currencies that are upgraded versions of two or even more coins at once. Thus, you can mix the options and functionality of each coin and get something quite cool. Bitcoin Private is considered a good and illustrative example of this phenomenon.

And let’s talk about Monero separately. Many users of the crypto community say that Monero can be called the currency with the least number of problems with protection. Initially, it appeared as a result of the fork of Bytecoin. Monero uses hidden addresses and RingCT to maintain the anonymity of “deals” and parties. It constantly includes new features, trying to stay ahead of those who want to access personal information. The project is entirely focused on confidentiality, sometimes it affects usability and user experience.

The reaction of some countries

The Financial Services Agency of Japan (FSA) obliged the bitcoin exchanges to withdraw from the auction Monero, ZCash, and Dash. The opposition to anonymous cryptocurrencies was also discussed in the US Secret Service. Texas lawmakers propose to de-anonymize cryptocurrency operations, as it reported BTC Wires.