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Anonymity is a very important feature of blockchain-level cryptocurrency transactions. A basic cryptocurrency transaction is relatively anonymous. Complicated addresses, sometimes alphanumeric. Tracing transactions like this (to the sender in person) on a blockchain level is near impossible. On the extreme, the idea of privacy coins is total anonymity.
Introducing certain clever algorithms, these privacy coin projects have at least shown the possibilities of a secured privacy-oriented transaction using blockchains with cryptocurrencies as the store of value and a token of exchange. Monero’s ring signature allows multiple signatures for a single transaction. Several public keys from the network are used to sign a single transaction.
Obscure? Just imagine several hands putting down a single signature, that’s harder to imagine, but yeah, that’s just how clever the ‘ring signature’ protocol is. With several signers for one transaction, it becomes harder or somewhat impossible to identify who actually performed the transaction.
Mimblewimble privacy coins achieve privacy by gathering huge amounts of transactions into a single incomprehensive package. The bulky and unarranged stacks of transactions are extremely difficult to parse. A snooper will have a very hard time sorting this package to trace transactions, it is hence considered a reliable privacy solution as the eavesdropper is unable to decipher single transactions. An additional component known as Dandelion is used by beam privacy coin and grin to ensure that this aggregation occurs before transactions are broadcast to other nodes.
Just to mention a few, different privacy coins invent algorithms that confer total (or near total) anonymity to cryptocurrency transactions. I am a huge fan of privacy coins, apart from their utility, it is a very brilliant technology. In a previous article, I stated a couple of reasons which could push the market dynamics to favor another privacy coin boom.
Human craving for privacy is on the consistent increase and with each age that passes our taste for privacy gets even more intense. From brick wall demarcations to building our houses on the hills far away from common views, the urge to stay private is innate in humans, well, most humans. Most (every) cryptocurrency wallet addresses are boring codes and rarely bear the name of their owners (except they wish to include this for blockchains that offer such feature), hence every transaction is private as the owners of the addresses can hardly be traced. However, this could only be a level of our craving for privacy and in the near future, we might grow to despise the fact that our transactions could be traced at all, even when they can’t be traced to us in person. We might want to ‘stay ghost’ in the near future, at least for the fun of it. This is the main reason why privacy coins took the trends in the first place, and a repeat won’t be a surprise.
But just as crypto enthusiasts quest for enhanced privacy features, there is also a craving for mass adoption of cryptocurrency and blockchain technology. Cryptocurrencies being accepted as legal tender and used widely by a group of people would delight Satoshi too…same here. Despite the recent wave of the wide acceptance of cryptocurrencies by reputable firms and stores, the road to any cryptocurrency being a legal tender is still very much blurry. Cryptocurrencies remain a revolution thriving without legal support. While I prefer cryptocurrencies this way for some reasons, mass adoption is still important.
However, to gain legal support, cryptocurrencies are bound to lose their anonymity feature (to an extent). Cryptocurrencies’ Blockchain-level anonymity is one of the drawbacks of mass adoption. Centralized exchanges breach this anonymity through customer identification programs and are almost completely centralized. This hints at what is bound to happen with mass adoption.
Sophisticated Blockchain-level security has performed satisfactorily in assuring the security of assets. It cuts off third-party interference and is relatively resistant to direct hacks. No system is resistant to socially engineered hacks. With blockchain’s hack-resistant technology and with third parties being cut off, financial administration with blockchains is impossible. Normal blockchains are transparent, but tracing a transaction without being able to control it is no step forward. For privacy blockchains with untraceable transaction features, it’s a huge turn-off for centralized administration.
To enable the wide exchange of cryptocurrency, the idea of centralized exchanges was born. Centralized exchanges allow users to transact cryptocurrency on their platform, but strip them of complete ownership of the security facilities. Being in charge, these platforms have worked over the years and have made cryptocurrency exchange on a large scale a possibility…but no one is anonymous on centralized exchanges.
With the advent of decentralized exchanges, enthusiasts get an opportunity to keep hold of their security facilities and retain ownership of their private keys while exchanging cryptocurrencies. But this concept is yet to impress believers of centralization who make up a good percentage of the ‘mass’. If cryptocurrencies will ever leave crypto-specific exchanges and gain widespread acceptance, then anonymity is a feature it is poised to lose completely.
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