Privacy Coins and Why You Should Care

I. Anonymity and Cryptocurrency

Anonymity is something that users should be largely familiar with at the point you’re reading this article. On the off chance that that’s not the case, IMMEDIATELY familiarize yourself with the ideas of privacy and anonymity. Briefly, privacy revolves around limiting the access of external entities to your actions and your data. Anonymity revolves around restricting the ability of external entities to link your actions and data to your identity. Your identity could also be considering an extension of your data, which would make anonymity a part of privacy.

One of the originally touted properties of Bitcoin is that it was anonymous, despite it not being so. This likely was clear to some groups from the outset, but public conception of Bitcoin was that it functionally was anonymous. Bitcoin was not private because the blockchain is publicly explorable. However, if you could distance the identity of the person who bought or mined some amount of Bitcoin with the wallet they spend it from, then you have functionally anonymized that wallet (and related transactions) to an extent. Despite their payments being publicly traceable, they aren’t traceable back to the user, in theory. This begins to fall apart when we bring heuristics into the scene. Think of heuristics as educated guessing algorithms. An example for Bitcoin might be: User A mined a block of Bitcoin, it was deposited in Wallet A, and then immediately sent to Wallet B. Without knowing who User A is, the time of the transaction, amount of bitcoin sent, block ID, etc are public knowledge. Now, what if Wallet B only connects to a Bitcoin node when it’s actively participating in a transaction. An external force snooping on Wallet B’s connection could, over the course of a few transactions, assume Wallet B to be the owner of the machine it’s being run on, and from there begin de-anonymizing all of the associated transactions. This could even lead to a chain reaction where many users and wallets suffer anonymity breaches. With KYC exchanges, this is obviously even more of an issue.

Enter privacy coins. For the purpose of this discussion, I will discuss Monero specifically, but many of the concepts apply to other currencies like Zcash. Monero is a privacy coin. While still having a blockchain and publicly verifiable transactions, the transaction details are not made known. These include the sender, the recipient, and the quantity of funds exchanged. Monero uses cryptographic ring signatures in its transactions which include other “decoy” transactions in each TX. Then, through cryptography magic, Monero ensures that the values published to the blockchain can be used to make sure each transaction is valid. For more of the magic, see the Breaking Monero reference below.

What’s important here is that, in essence, a specific transaction on Monero cannot deterministically be linked to a User. How is this different than Bitcoin? A Monero transaction also cannot be deterministically linked to a Wallet. Combine this with the fact that the sender’s wallet and receiver’s wallet, as well as the TX quantity, are not public info, and you have ripped to shreds the heuristic example above about Bitcoin. Aside from heuristics, this also means that Monero can anonymize currency, even that bought from a KYC exchange (like Coinbase).

Please know that there are best-practices for Monero too. Monero is still vulnerable to some heuristics, especially if only one side of a transaction uses proper caution. For example, If you buy 1 XMR from a KYC exchange, send 1 XMR straight from your personal wallet to a vendor, and the vendor then immediately goes and exchanges that XMR for fiat currency, someone snooping on both exchanges could see that, over the course of an hour, exactly 1 XMR was purchased by you, and exactly 1 XMR minus fees was exchanged by the vendor. Especially with stranger numbers, it doesn’t take a genius to put 2+2 together. This leads me into Section II.

II. Guidance for Buyers

  • Stagger your transactions after buying/exchanging currencies. This makes it harder for prying eyes to link certain transactions to certain times.
  • Try not to lump-sum send entire wallets worth of XMR. That is, if you need to pay 1.5 XMR, don’t buy exactly 1.5 XMR if you can avoid it. Buy more, preferably enough for multiple transactions. This helps prevent irresponsible vendors from de-anonymizing you.
  • Use your pre-market wallet through Tor. This will limit IP snooping and makes tracing much harder.
  • A little bit of paranoia is healthy. If passing your Monero through an extra wallet makes you feel more secure, do it. XMR transaction fees are super cheap.

III. Guidance for Vendors

  • Most of this is the same as for buyers, really. Try and think of ways your identity, transactions, and buyers can be linked together. It is partially your responsibility to do everything you reasonably can to prevent that from happening.
  • Do not exchange funds from a single order immediately after receiving funds. Let them wait, maybe let different amounts sit in different wallets for a bit.
  • Healthy paranoia.
  • Use non-KYC exchanges like LocalMonero or Bisq.
  • (I don’t have much more advice here, please let me know in the comments and I will add it.)

IV. Mythbusting and Final Words

There are a lot of myths around cryptocurrency, and privacy coins are no exception. Let’s discuss a few of them. This is just an intro and doesn’t really discuss remote nodes / local nodes etc.

  • “Monero is a silver bullet.” Absolutely not. Please, please take a few hours to watch the Breaking Monero series linked below. This is a several-hour video series where a few developers go over all of the ways Monero can be broken. By broken, this mostly means de-anonymization of users and wallets.
  • “I cannot be traced if I use a privacy coin.” Heuristics apply. Linking users to wallets to transactions is much, much, MUCH harder than with Bitcoin, but not impossible. The U.S. government has already bought a contract from a company claiming to be developing an effective heuristic for many transactions on the Monero blockchain (althought it’ls likely not very effective). The Breaking Monero series details such heuristics more effectively than I can in a Dread post.
  • “Bitcoin can be made just as secure as Monero with proper OpSec.” Bitcoin is fundamentally flawed from a privacy and anonymity standpoint. Monero achieves the same level of verifyability and trust in transactions as Bitcoin, while making it much harder to trace. Monero is largely considered impossible to deterministically de-anonymize right now.

For some closing points, I’d just like to argue that there is no reason not to use privacy tokens such as Monero to improve your OpSec dramatically. Make your transactions harder to trace, make your accounts harder to de-anonymize. Furthermore, Monero is a LOT cheaper than Bitcoin. The average BTC transaction fee is around 5 USD right now. Monero’s is fractions of a cent.

This is just a brief introduction to privacy tokens, and how one like Monero can better protect you than other options. Even on BTC only markets, it’s easy enough to convert to and from XMR that it makes a great “chain-breaker” for your transactions.

Breaking Monero

Other references and helpful links:

3 thoughts on “Privacy Coins and Why You Should Care

    1. Bitcoin is less private than Privacy coins because the Bitcoin Blockchain is publicly accessible. This is why “Privacy coins” of which Monero (XMR) is generally seen as the most popular one are becoming more popular.

      There are of course ways to make the usage of Bitcoin safer by for example forcing all transactions over Tor. But privacy coins are making headway in the usage of cryptocurrency, especially in our community.

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