We've seen explosive and unparalleled development in the crypto-currency industry over the past decade. With this development, the value of financial privacy has been addressed by many individuals.
Privacy coins are what we call flying the flag for privacy.
In this post, we will learn more about what coins are for privacy and why privacy is such a hot topic.
Projects and cryptocurrencies adapted to various uses have been developed as the cryptocurrency field has advanced. For one simple reason, some, such as Monero (XMR), were created: Digital money is private and fungible.
Crypto-currency anonymity vs privacy
If you've kept up with the past of Bitcoin's rollercoaster, Silk Road, the notorious online black market that embraced Bitcoin as a means of payment, is probably familiar to you.
The term "Bitcoin" immediately became synonymous with drug dealers, cybercrime and money laundering following the shutdown of the Silk Road by the FBI.
Shortly after, the "high tech hacker and criminal money" stigma of Bitcoin led individuals to associate "private money" or "dark money" with it.
But with privacy in mind, Bitcoin was not planned. In fact, the ledger of Bitcoin is 100 percent transparent, with every single transaction registered on a publicly accessible blockchain for anyone in the world to see, including information about its origin, destination, and value.
The unusual combination of 27-34 letters and numbers is a Bitcoin wallet address. This random string of characters may seem private and anonymous at first glance, but that isn't at all the case.
Why is Bitcoin not private, then?
The blockchain of Bitcoin is 100 percent public. This means that since the birth of the network, you can head over to Blockchain.info, a Bitcoin block explorer, and look up origin, destination and value information on any Bitcoin transaction. Wallet balances are also seen online.
The origin, destination, value and date of of transaction are clearly illustrated in the Transactions section. Because the blockchain of Bitcoin does not obscure transaction information and wallet balances, one clear statement may definitively be concluded:
There is no private Bitcoin.
Why is Bitcoin anonymous (sometimes)?
Bitcoin will provide anonymity, sort of, depending on how it is used. Anonymity with Bitcoin can be accomplished on a macro level by disassociating your physical identity with your address in the Bitcoin wallet.
Although this might sound easy on paper, it's actually very difficult to pull off in the real world - particularly if you're someone who's interested in using the Bitcoin network to transact on a regular basis.
What makes a private crypto currency?
Privacy
A private cryptocurrency should make concealing the wallet balances and transaction history of users a priority. Details of transactions can only be available when a consumer needs them to be.
In addition, it should not be possible to build a "rich list" with a private cryptocurrency, a list of the wealthiest wallet addresses on the network.
Fungiblity
It is necessary for a private cryptocurrency to be fungible, where two cryptocurrency units are often equal and interchangeable. Two examples of fungible assets are USD1 and 1kg of gold in the real world:
A USD1 bill may always be replaced with another USD1 bill, and it is always possible to replace 1kg of gold with another 1kg of gold.
Bitcoin is not a fungible asset since its transparent blockchain allows coins and wallets to be blacklisted based on their past background of transactions.
In other words, with a dubious or illegal transaction history, an individual may opt not to accept Bitcoins, making such coins less valuable than those with a clear transaction history that can be transacted openly on the Bitcoin network.
Decentralization Execution
In order to guarantee a trust-less and protected value transfer setting, private cryptocurrencies should be sufficiently decentralized.
In an ideal case, a private cryptocurrency should have a few layers of decentralization including geographical positions of nodes, a proper consensus algorithm, mining hash power distribution and more.
Liquidity
This is a basic concept: is there a cryptocurrency demand? If no one is prepared to consider it, then it can't be used as digital private money.
Using private crypto-currency instances
Now that we have addressed what makes a private cryptocurrency private, let's go over a few private cryptocurrency use cases.
Cash in digital
It can be used as digital cash since a private cryptocurrency is fungible and can not be personally discriminated against based on past transaction background.
When you deal with a Bitcoin mate, he or she will be able to see the entire history of transactions and related wallet addresses.
Personal storage of resources
It can safely be used as personal wealth storage because a private cryptocurrency does not show wallet balances on the public blockchain. Your balance doesn't show on a public website for the entire world to see when you set up a bank account.
A "crypto bank account" can apply the same privacy requirements, and this is most certainly not the case for Bitcoin.
Being billed in crypto currency
It is a perfect means of financial exchange between employer and employee, because a private cryptocurrency offers unlinkability between sender and recipient.
Most crypto-currency-based compensation actually depends on Bitcoin, which has a fully open ledger. They will be able to see your past transaction history on the network unless you use a special Bitcoin address only for communicating with your boss.
Based on your financial history, this could result in profiling.