Cryptocurrency has slowly gained momentum over the past few years. This digital currency has received public endorsements by well-known celebrities and even became a legitimate form of tender in countries like El Salvador, which has only added to its popularity. As a result, there are over one billion crypto users worldwide, and these numbers will continue growing until the next decade. However, there is one catch.
While cryptocurrency is secure to work with, the transactions themselves are not always private. Despite the sophisticated encryption, you may fear getting tracked, hacked, or viewed on the public ledger. So the question arises, how private is this digital currency, and what are the limitations to its transparency
How Does Cryptocurrency Work?
Cryptocurrency is a digital asset powered by blockchain technology. A blockchain is a list of records arranged in blocks connected by complex cryptograms. Blockchain technology operates on three fundamental principles—transparency, decentralization, and the ability to be unchangeable.
As you look at the transparency of the digital asset, cryptocurrency records are available in public ledgers. So if you make a transaction across any network, it goes on public records. For instance, if you’re looking up the rates of Ethereum vs Euro and choose to convert 10 Ethereum to Euro, your wallet address will be permanently recorded on the blockchain. This makes all your records against your unique identifying number completely transparent. However, your name and other identifying markers like gender and age are not available for viewing, giving you a certain degree of anonymity. But, if another crypto user knows your wallet address, they can see every transaction you made. In this case, your records across the Ethereum network are readily available.
Blockchain technology is also decentralized, which means that the blocks are freely regulated across networks and don’t have a central governing unit. You’re responsible for maintaining your cryptocurrency.
But one of the most excellent perks of cryptocurrency is the ability to remain immutable. Your coins cannot get duplicated, and once a transaction is in motion, it cannot be altered. Still, for many users, this is not enough to compensate for the privacy of using digital currency.
Pitfalls of Blockchain Technology
When it comes to cryptocurrency, the advantages of blockchain technology outweigh the roadblocks while working with this lucrative tool. But acknowledging where this digital resource struggles with cryptocurrency is imperative in finding a solution. Here are some reasons why users are pushing for more privacy while building their crypto profile:
- Difficulty in Managing Identity
When you start working with cryptocurrency, you get a unique identifying cryptographic key that you have to conceal. If your key is visible, anyone can impersonate you and hack into your wallet to use your coins. They may also carry out transactions using your currency, which can result in a significant loss for you. If you’re an owner of an NFT or have invested money into businesses that allow cryptocurrency, this is a massive hit to your financial health.
- Lost Identities
There is also a chance you can lose or accidentally destroy your key. If this occurs, you cannot retrieve your assets, and your digital currency gets lost in the blockchain. Losing your key can happen if you don’t backup your identity adequately or rely on the network to tell you your unique key without committing it to memory and saving it. Your best defense against a lost key is to write down the number of your cryptographic key and put the physical copy in a safe hiding spot.
The Need For Privacy Coins in Cryptocurrency
You may have limited privacy while working on the blockchain as a user. Your currency may be anonymous, but your transactions are not. Since cryptocurrency is becoming vastly popular, the number of records is also increasing. For anyone with malicious intentions or who has a desire to hack into any crypto account, all they need is to track down your wallet ID and follow the transactions you made using this numerical identification. This is why there was a need to introduce privacy coins. These units get created to protect your privacy as you make exchanges.
Your unique identifying number is no longer visible or trackable. For many crypto users, this is a perk as it allows them to work on their digital assets without worrying about their records available on the public ledger. But, countries like India also see privacy coins as an ethical concern since the lack of tracing can encourage users to launder money and engage in other criminal offenses pushing the government to ban these coins.
How Do Privacy Coins Work?
Privacy coins are a type of cryptocurrency. But unlike common cryptocurrencies, privacy coins are hard to track and don’t get identified on public ledgers. So if you’re working with a privacy coin, you can hide your wallet address and make transactions as you please. For your understanding, here’s how these coins work:
- New Addresses. Every time you do a transaction, you get a unique address that protects your identity. Picture the way VPN blocks your IP address.
- Zk-SNARKs. This is an acronym for the Zero-Knowledge Succinct Non-Interactive Argument of Knowledge that lets you prove the authenticity of your transaction without the need to show your details.
- Ring Signatures. These are a block between a transaction and a key. So when you exchange cryptocurrency, your details get recorded publicly, and any other user can link the activity to your address. Still, in privacy coins, the ring signature prevents that from happening. They display a collection of signatures, making it hard for other users to track down your identifier.
Common examples of privacy coins include Zcash, Monero, and Tornado Cash.
Cryptocurrency is the cash of the future. The innovative technology that goes into maintaining and exchanging cryptocurrency cannot be ignored. But like any digital asset, there are pros and cons to owning and distributing this resource.
One of the most pressing concerns is the level of privacy offered as you make transactions. Traditional cryptocurrency may be easy to exchange, but your details go on public ledgers. At the same time, the unique key you have to help you access your digital assets is easily lost or stolen since there are minimum layers of security hiding it.
Ultimately this has led to the need to make privacy coins and use them for transactions. These coins hide your unique identifying number, making it harder to narrow down on you. This saves you from hackers and lets you build your portfolio in peace. But for some countries, the lack of transparency is a criminal offense and has led to cryptocurrency becoming banned. There are specific ways privacy coins get blocked; these include concealing your address, providing the validity of your transactions without giving away who you are, and preventing users from tracking you.