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Views: Anonymous types of cryptocurrencies are gaining more and more popularity in the world of digital assets due to their ability to hide information about transactions and owners. Let's take a closer look at what is called anonymous cryptocurrencies, their working principles, pros and cons, and legal aspects.
What are anonymous cryptocurrencies
Anonymous cryptocurrencies are digital assets that, unlike other types of cryptocurrencies, were designed to maximize user privacy. They hide transaction details such as sender, recipient and transfer amount, making them virtually invisible to outside observers.
The main purpose of such cryptocurrencies is to protect financial privacy and prevent users from being tracked.
Principle of operation of popular anonymous cryptocurrencies
Each anonymous cryptocurrency uses its own unique technologies to achieve privacy. Let's consider the working principles of the three most famous projects:
Monero (XMR)
Monero (XMR) is one of the most well-known and effective cryptocurrencies created specifically to maximize privacy. It uses a number of technologies that hide transaction data, making them virtually untraceable. Let's take a look at the basic principles of Monero below.
1. Ring Signatures.
Ring signatures hide transaction sender data by creating a group of multiple signatures.
How it works:
Each transaction includes real sender data and a few false entries (called “impurities”). This additional data is generated automatically and can be taken from other transactions in the network.
Visually, it looks like a circle of several signatures where it is impossible to determine which one is real.
However, each signature confirms that the transaction is genuine.
Example: If a sender transfers 10 XMR, an observer can only see that the money comes from one of several addresses, but cannot determine the exact source.
2. Stealth addresses (Disposable addresses)
Stealth addresses are used to hide data about the recipient.
How it works:
The sender generates for each transaction a unique one-time address where the funds are received.
This address is linked to the recipient's primary public address, but it cannot be directly linked to the owner.
The recipient uses a private key to access the funds sent to the stealth address.
Benefit: Even if someone researches the Monero blockchain, they will not be able to determine who the ultimate recipient of the funds is.
3. Ring Confidential Transactions (RingCT).
RingCT hides the amount that is transferred in a transaction.
How it works:
Instead of explicitly stating the amount in the blockchain, Monero uses a mathematical method to authenticate the transaction without revealing the exact amount.
Verification is performed using a cryptographic function that proves that the transaction amount is within acceptable limits.
Example: If someone sends 25 XMR, the blockchain will encrypt the amount and no one will know the exact value.
4. Dandelion++ (Data Transfer Mechanism)
Dandelion++ helps in hiding the original location of the transaction.
How it works:
Unlike the traditional way of data transmission in a network, where information is propagated to all nodes at once, Monero uses a “two-step propagation” method:
In the first stage, a transaction is transmitted through a few random nodes, hiding its source.
In the second stage, the data is propagated throughout the network as normal.
Benefit: This makes it difficult to trace the IP address of the user who initiated the transaction.
5. Bulletproofs
Bulletproofs is a technology that makes transactions more efficient and cheaper while maintaining privacy.
How it works:
Bulletproofs reduces the size of the cryptographic proofs used in RingCT, which reduces the load on the blockchain and reduces fees.
The result:
Monero maintains high network throughput and provides cost-effective transactions.
6. Dynamic blockchain parameters
Unlike many cryptocurrencies, Monero has a dynamically changing block size.
How it works:
When there is increased activity on the network, the block size can increase to accommodate more transactions.
This prevents latency and allows for stable performance.
7. No fixed address binding
The Monero blockchain does not contain any fixed data that can be linked to a specific user.
Each transaction and address is unique, making it impossible to create a chain of data to analyze.
ZCash (ZEC)
ZCash (ZEC) is one of the representatives of anonymous cryptocurrencies, which operates on zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge) technology and which provides transaction privacy by hiding data about users, amounts and other aspects of transactions. ZCash represents one of the most prominent anonymous payment solutions in the cryptocurrency sphere. Unlike most cryptocurrencies such as Bitcoin, where transaction information is public, ZCash guarantees user privacy and anonymity.
The basic principles of ZCash are:
1. Using zk-SNARKs for anonymity
ZCash uses zk-SNARKs cryptographic technology to ensure the anonymity of transactions. This allows a transaction to be confirmed without revealing any information about the parties, amounts, or time of funds transfer.
How it works:
When a user sends ZCash, it creates a cryptographic proof (zk-SNARK) that confirms that the transaction is valid, without revealing specific details (such as who sent the money, who received it, and how much was transferred).
In this way, all data remains encrypted and is only visible to the recipient, who can decrypt it using their private key.
Benefit: This hides any traces and details of transactions on a public blockchain network, making it completely anonymous.
2. Encrypted Transactions (Shielded Transactions)
ZCash offers two types of transactions:
Transparent transactions (T-addresses): similar to regular Bitcoin transactions where all data (sender, recipient, amount) is public.
Shielded transactions (Z-addresses): these are encrypted transactions that use zk-SNARKs to hide all data. These transactions are the main element of privacy in ZCash.
How it works:
When a user selects a Z-address (shielded address), all information about the transaction, including the amount and participants, is encrypted. This prevents third-party monitoring and analysis of transactions. However, these transactions are more difficult to process and require more computational resources to verify.
3. Two-way anonymity
ZCash provides two-way anonymity, which includes both sender and receiver anonymity.
Sender: When sending funds from one user to another, the sender uses his Z-address, which hides his identity and the transaction amount.
Recipient: The recipient can also choose to use the Z-address to receive anonymous transfers. This means that no one involved in the transaction can be traced on the public network.
4. Separation of public and private data
Although ZCash allows transaction data to be hidden, it is important to note that transaction information is still stored on the blockchain. However, unlike Bitcoin, where all data is available to everyone, ZCash allows a minimal amount of information to be stored, giving the user a choice between open and closed transaction methods.
Open transactions: These types of transactions are used for transparency and legal accountability.
Closed transactions: This data is encrypted and can only be decrypted with a private key.
5. Sapling Protocol
The Sapling protocol was implemented in ZCash to improve privacy and efficiency. It significantly reduces the size of cryptographic proofs and speeds up the process of creating and verifying closed transactions.
How it works:
Sapling utilizes lighter and faster cryptographic computations, making transactions on ZCash more efficient and cheaper than ever before. This improvement significantly reduces network load and increases throughput.
6. Consensus mechanism and issuance
Like Bitcoin, ZCash uses Proof of Work (PoW) to maintain network security and validate transactions. However, ZCash also has features in its issuance:
The mining process not only mines coins for current miners, but also some of the coins go to fund a project support fund (e.g. a fund for research and development).
A total of 21 million ZCash coins will initially be issued, similar to Bitcoin, but with the inclusion of a funding mechanism.
7. Public and private addresses
P-addresses (public address): These addresses work similarly to public addresses in other cryptocurrencies and allow for normal, open transactions. They are used to transfer funds from one user to another with open data.
Z-addresses (shielded address): These addresses are used for closed transactions, hiding all data such as amounts and recipient information.
Dash
Dash (Digital Cash) is an anonymous cryptocurrency that was created to provide faster, cheaper, and more anonymous transactions than Bitcoin.
1. Using PrivateSend technology for anonymous transactions
Dash has a unique PrivateSend feature in its arsenal, which provides a high level of transaction privacy. This technology is based on the use of CoinJoin, a cryptographic technique for combining several transactions into one. The working principle of PrivateSend can be explained as follows:
When a user wants to send Dash, their funds are combined with the transactions of other users.
The amount and recipient remain hidden, as the combined transactions create a so-called “blend” of funds.
This functionality ensures that the source and recipient cannot be traced, providing privacy at the transaction level.
2. Proof of Work (PoW) and Proof of Service (PoSe) consensus mechanism
Dash uses a hybrid consensus mechanism that combines elements of Proof of Work (PoW) and Proof of Service (PoSe). This maintains a decentralized network and improves security while speeding up transactions.
Proof of Work (PoW):
Dash uses PoW for mining, much like Bitcoin. Miners solve complex cryptographic problems to add blocks to the blockchain. This helps maintain network security and make transaction confirmations.
Proof of Service (PoSe):
This system is used to ensure the stability and operation of MasterNodes. MasterNodes are special network nodes that perform functions to ensure transaction confidentiality and speed of transactions. MasterNodes owners are required to block 1000 Dash to be able to participate in network validation and earn rewards. These nodes play a key role in PrivateSend and InstantSend.
3. InstantSend - Instant Transactions
Additionally, Dash offers an InstantSend feature that allows transactions to take place in seconds, without having to wait for confirmations on the blockchain, as is the case with Bitcoin and other cryptocurrencies.
How InstantSend works:
When a user sends funds through InstantSend, the transaction is blocked on the network for a few minutes to prevent double spending. During this time, the transaction receives instant confirmation and the user can rest assured that the money is delivered to the recipient without delay. This makes Dash flexible and very convenient for everyday transactions and micropayments.
4. Masternodes and decentralized network
One of the most distinctive features of Dash is the presence of MasterNodes - servers that play an indispensable role in making the network work. To become a MasterNode owner, you need to block 1000 Dash. In turn, the owners of MasterNodes receive a part of the rewards for mining, as well as participate in making decisions about the development of the network (for example, about possible updates or improvements).
How MasterNodes work:
MasterNodes support InstantSend and PrivateSend features, help speed up transaction processing, and provide voting and management of network development.
Pros and cons of anonymous cryptocurrencies
Pros:
Privacy: Full protection of transaction data.
Financial freedom: Users can make transfers without fear of surveillance.
Security: Reduces the risk of identity hacking attacks.
Cons:
Links to illegal activity: Often used on dark web networks.
Limited availability: Not all exchanges support anonymous token trading.
Risk of regulatory pressure: Some countries ban their use.
Why not all exchanges allow trading them
Many cryptocurrency exchanges avoid working with anonymous assets because of:
Regulatory requirements: Exchanges are required to comply with KYC and AML regulations, which is against the principle of anonymous cryptocurrencies.
Money laundering risks: High levels of privacy can attract criminals.
Pressure from authorities: Some jurisdictions explicitly prohibit trading in such assets.
Legality of anonymous cryptocurrencies
The legal status of anonymous cryptocurrencies varies from country to country.
US and EU: In general, active use of cryptocurrencies is allowed, transactions must be transparent to regulators.
Japan: Strictly prohibited trading of Monero and ZCash on exchanges.
Russia and China: Cryptocurrencies are strictly controlled, and anonymous tokens often fall into the “gray zone”.
It is important to research local laws before investing in or using anonymous cryptocurrencies.
Conclusion
Anonymous cryptocurrencies are innovative financial instruments that offer users the highest rate of privacy. However, their use comes with both benefits and risks, including legal restrictions. Before you start working with such assets, it is important to study their peculiarities and be prepared for possible difficulties.
Frequently Asked Questions
1. What is the most popular anonymous cryptocurrency?
Monero (XMR) is considered the leader among anonymous cryptocurrencies due to its high privacy standards.
2. Is it safe to use anonymous cryptocurrencies?
Yes, but it is important to exercise caution and only use trusted wallets and exchanges.
3. Is it possible to legally own Monero?
It depends on the country of residence. In some regions, the use of anonymous cryptocurrencies is restricted or banned.
4. Why are anonymous cryptocurrencies criticized?
The main criticism is related to their use in illegal activities such as money laundering or terrorist financing.
5. Where can you buy anonymous cryptocurrencies?
Monero, ZCash and Dash are available on exchanges such as Binance, Bybit, OKX, HTX, Gate. io, BingX. However, registration and verification will be required to purchase.
