1. What are anonymous cryptocurrencies?
Anonymous cryptocurrencies are peer-to-peer payment systems with their own internal unit of account, focused on ensuring complete privacy of financial transactions through cryptographic protocols that make it much more difficult or impossible to audit the network data.
Among the largest anonymous digital currencies by market capitalization: Monero, Dash and ZCash.
2. What is Monero?
Monero is a peer-to-peer payment system with a unit of account of the same name based on the CryptoNote cryptographic protocol, which ensures anonymity of transactions by means of ring signatures and stealth addresses.
The CryptoNote protocol was created by a person or group of people under the pseudonym Nicholas van Saberhagen and was first implemented in the cryptocurrency Bytecoin, whose fork is Monero [April 2014].
Initially, data obfuscation in the Monero network was done by mixing transaction inputs from different senders, generating one-time addresses for each transaction, and hiding the amount being transferred.
In October 2018, Monero developers successfully implemented a hardforward with the activation of the Bulletproofs protocol, aimed at significantly reducing the size of anonymous transactions and commissions by replacing the RingCT [circular confidential transactions] mechanism, which required a large amount of computation on the full-node side.
The Monero network uses the Proof-Of-Work consensus algorithm targeting GPU miners. In April 2018, developers implemented a hardfork aimed at countering ASIC devices.
Despite the high level of privacy, if attackers manage to seize control of a larger part of the network as part of the attack, de-anonymization of transactions is possible.
3. What is ZCash?
ZCash is an open-source peer-to-peer payment system developed by Zerocoin Electric Coin Company and the unit of account of the same name based on the Zerocoin and ZeroCash protocols from Johns Hopkins University cryptographers, focused on ensuring transaction privacy through the zk-SNARK zero-disclosure proof protocol.
zk-SNARK allows users to verify the truth of so-called secure transactions without disclosing the parties and amount, leaving only timestamps public. All coins are interchangeable and cannot be traced back to their origin.
Users can also make public transactions from open addresses if they want to save on fees, but the balance information will be hidden if the recipient is a protected address.
Note that in late October, the ZCash network underwent the Sapling hardforge, aimed at significantly reducing the size of transactions, speeding them up, switching to a new address format and achieving privacy by default. The update allows users to perform secure transactions from lightweight clients.
The ZCash network uses the Proof-Of-Work consensus algorithm targeting GPU miners, but the developers have not yet implemented protection against ASIC devices, although the appropriate software is being developed by the nonprofit organization ZCash Foundation.
4. What is Dash?
Dash is a peer-to-peer payment system with the unit of account of the same name, which appeared under the name XCoin as a fork of the bitcoin protocol in January 2014. Until March 2015, it was also known as Darkcoin.
A distinctive feature of the Dash is not only the anonymization of transactions, but also the use of masterknodes, which share equally with miners the remuneration for maintaining the network. The owner of the masternode must post a pledge of 1,000 DASH so that he is not motivated to act in a hostile manner toward the network.
The Dash network employs a “PrivateSend” shuffling mechanism based on CoinJoin technology to ensure transaction privacy. Coins are shuffled by random masterminds over a certain number of rounds [recommended – 4], hiding the connection between sender and recipient.
The “InstantSend” mechanism is also available to Dash users to make instant payments with higher fees. Transaction inputs using InstantSend are evaluated by a quorum of 10 masterminds, who decide whether to approve or reject the transfer.
The Dash network uses a Proof-Of-Work consensus algorithm based on the X11 hashing algorithm and a special Dark Gravity Wave complexity calculation algorithm based on Moore’s Law.
5. Why are anonymous cryptocurrencies often criticized?
Developments in web extensions and malware allow the computing power of personal computers and mobile devices to be used to mine anonymous cryptocurrencies, primarily Monero. Some of these tools also cause significant damage to exploited devices.
Anonymous cryptocurrencies allow attackers who attack trading platforms or extort funds through specialized software [such as WannaCry] to hide the movements of stolen money. Japan’s Financial Services Agency (FSA) has ordered bitcoin exchanges to remove Monero, ZCash and Dash from trading. The U.S. Secret Service also spoke about countering anonymous cryptocurrencies.
In terms of technology, the criticism mainly comes down to the size of anonymous transactions, requiring a large amount of memory from a full node, but the mentioned upgrades to Monero and ZCash networks are gradually solving this problem.
6. What other cryptocurrencies allow anonymous transactions?
The BitShares platform offers users confidential transactions in conjunction with stealth addresses .
The ZenCash or Horizen network, an offshoot of one of the ZCash forks, also employs the zk-SNARK protocol with the ability to send private messages along with secure transactions. Note that ZenCash has been the target of a successful re-spend attack.
The Verge network employs an IP anonymizer and the Wraith protocol to perform private transactions. The Dash fork PIVX network also uses the Zerocoin protocol to hide all transaction metadata.