ViaBTC｜A Simple Introduction to Three Privacy Coins: XMR, ZEC, and DASH
Suppose there’s a currency payment system that processes millions of transactions every day. It would be terrifying if each transaction is transparent and traceable. We all know that most exchanges ask their users to go through KYC authentication, and though the identity of an authenticated trader is not readily available in cyberspace, under certain circumstances, government agencies can easily identify the holder of an address through KYC.
This March, a government sent a letter to eight crypto exchanges, asking them to stop providing services for users in another country. A well-known exchange responded to the request and blocked more than 25,000 addresses related to that country because it believed that these persons or entities are involved in illegal activities. As such, whether they use BTC or other cryptos such as ETH, crypto users are all transparent in the eyes of the government.
That said, what is the solution to these problems? The answer is privacy coins.
Privacy coins are a unique class of cryptocurrencies that power anonymous blockchain transactions by obscuring the flow of funds in a network, which hides the identities of the parties involved and the amount transacted. At the moment, mainstream privacy coins include Monero (XMR), Zcash (ZEC), and Dash (DASH).
Monero (XMR) is now the most valuable and widely used privacy coin. Since its birth in 2014, XMR has survived multiple market cycles thanks to the XMR community. Monero was co-founded by an anonymous hacker community with hundreds of community members, over 500 of whom have contributed to Monero’s codes. Right now, the project’s leading team consists of seven members, and only two of them have revealed their identities: Riccardo and Francisco.
For more information about Monero, please refer to our previous article that focuses on the crypto (https://link.medium.com/7vwBfKFSdub). Today, we will dive into the other two famous privacy coins: Zcash and Dash.
Zcash, born in 2016, is the first blockchain network to use zk-SNARKs, a novel zero-knowledge cryptography protocol through which users can prove their ownership of certain information (e.g. private key) without revealing the information. Simply put, if A tells B that he’s got the key to a door, with zk-SNARKs, A will not have to show the key to B but only needs to open the door to verify his statement. Relying on such a technology, this privacy coin allows users to send and receive Zcash without disclosing the sender, receiver, or the amount transacted.
Setting aside the use of privacy-preserving technologies, Zcash is very similar to Bitcoin. For example, the two cryptos have the same supply cap (21 million). In addition, both Zcash and Bitcoin halve their block reward every 4 years. This is the case because Zcash is based on the Bitcoin code. Despite certain modifications, the coding of Zcash is mostly the same as that of Bitcoin. Like Bitcoin, Zcash is based on PoW and also requires massive hashrates from miners to maintain the network.
However, in light of the current Zcash difficulty (12.3 GSols/s), miners have to use an ASIC and get connected to pools to earn a profit. The mining guide and pools recommended published by Zcash are as follows:
Dash, originally called XCoin, was launched in January 2014 and has been renamed several times. Like Zcash, Dash is also a technical improvement of Bitcoin. First of all, it introduced a two-tier network algorithm that’s also known as Masternode. Specifically, the first tier is the same as the Bitcoin network: miners pack transactions in the network to generate blocks. The second tier, on the other hand, conducts the consensus confirmation of blocks through the Masternode network. The adoption of Masternode and InstantSend has significantly simplified the process of transaction confirmation, allowing the network to confirm and send transactions in just a few seconds.
Secondly, Dash uses the Coinjoin, a method of mixing coins, which not only allows multiple users (at least three users) to mix coins but also conducts multiple rounds of coin mixing that further improves the degree of anonymity. Here is a simple case: If five users initiated transactions at the same time, Dash would first mix the five transactions and then assign them to the corresponding recipients, but only five records and the five transactions would be shown on the network, and no one would be able to find out about the total amount transacted, which user initiated which one of the transactions, to whom the cryptos were sent, and the specific amounts sent.
In addition, Dash employs the X11 approach. In other words, 11 hash algorithms are used for 11 rounds of computations. The adoption of multiple algorithms improves the network’s security performance and makes it resistant to ASICs. Despite that, given the current Dash difficulty (2.4 PH/s), miners can only make a profit by joining a pool. The good thing, though, is that users can mine Dash through veteran pools like ViaBTC Pool and AntPool.
Under today’s circumstances, people in some regions are increasingly open to the adoption of privacy coins, and the market has great potential in the future. Of course, in terms of scale, privacy coins are no match to leading cryptos such as Bitcoin and Ethereum, and the fundamental reason for their small user base lies in regulation. In some countries, privacy coins are completely banned because enforcement departments are not the fans of anonymity. This creates a paradox: cryptos have to choose between anonymity and scale. More specifically, the more anonymous a coin is, the more difficult it will be for the coin to promote itself and attract users. Will future privacy coins resolve this paradox? Let us wait and see.