During the first days of Bitcoin (CRYPTO: BTC), an estimated 25% of wallet users used digital currency for illicit activities such as buying drugs or illegal firearms, or as payment for human trafficking. It was impossible to catch the criminal syndicates behind the deals at the time. After all, cryptocurrency exchanges were once not legally required to verify the identity of customers, which has resulted in widespread money laundering, from cryptocurrency to fiat currencies.
All of that has changed with the rise of cryptocurrency companies like Chainalysis. EThe very Bitcoin transaction since its inception is available in the public ledger, so analytics companies can easily track and report the flow of funds from suspected wallet addresses being used for illicit activity. Problems arise when criminals sell “contaminated” Bitcoins on exchanges to new investors or send them to legitimate merchants. The new recipients could then be confronted with questions from the police although they are oblivious to the whole ordeal. This fundamental flaw has led to the rise of privacy rooms.
How do privacy coins work?
Privacy coins are equal and fungible by default. Despite the use of a public blockchain network, they hide the identity of the participants and the amounts of the transactions. Remittances therefore become untraceable – ensuring that no part could be “soiled” due to its history. In addition, privacy coins are much more economical, take less time, and are more environmentally friendly than Bitcoin.
The most popular privacy piece right now is Monero (CRYPTO: XMR), with a market capitalization of $ 4.2 billion. To achieve its primary purpose, the Monero network uses ring signatures. That is, it broadcasts decoy wallet addresses with every transaction, confusing the outside observer. Additionally, the network assigns a unique and unique wallet address / key to both the sender and the buyer to ensure the transaction goes smoothly. In addition to this, Monero wallet users have stealth addresses in addition to a public address, so it is impossible to find the transaction amount with the first one.
In May, the developers of Monero launched the Atomic Swap feature. This allows Monero users to convert their holdings into Bitcoin without a middleman – without carrying over previous Monero transactions that the public can see on the Bitcoin network. The slight downside of Monero is that it is inflationary, with a long-term coin dilution rate of 1% to attract miners.
The next most popular privacy piece is Hyphen (CRYPTO: DASHBOARD), with a diluted market capitalization of $ 2.9 billion. Unlike Monero, there is a maximum supply cap of 18 million coins, of which around 11 million are already mined, making it deflationary. It is also optional to send money through the public network. Meanwhile, the private network breaks each transaction down into several smaller denominations and then mixes the wallet addresses with other users (who have also seen their transactions broken) to protect them from the public.
The third most popular privacy coin is Zcash (CRYPTO: ZEC), with a diluted market capitalization of $ 2.2 billion. Similar to Dash, Zcash allows users to choose between sending private and public transactions. To do this, it uses a cryptographic mechanism known as zk-SNARK, a type of zero-knowledge proof. In this setup, one user sends money to another as they would with any cryptocurrency, but network transaction data is masked / hashed and proven to the recipient to protect it from the public eye. The coin has a maximum supply of 21 million, with approximately 12 million in circulation.
Even after the abrupt sell-off of the ongoing bear market, Monero, Dash and Zcash are all up over 100% from last January. Due to the limited supply, cryptocurrency prices tend to rise with increasing network adoption – which I believe will be the case for privacy coins as Bitcoin faces fungibility issues. croissants. Their ability to remain level and fungible in the context of increased regulatory and third-party control over crypto public ledgers as a whole is a major value proposition for investors. Therefore, now is a great time to buy the dip on one of them.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.