Comparative Review of Privacy Token and Token Economics
Contributed by @Dennis_Z
This article encompasses pretty much everything you need to know about the Landscape of Privacy Tokens. It is a bit long and feel free to use Table of Contents to jump to specific sections. If you think the article is helpful, please Follow Me and Clap 50 Times [yes, you can clap multiple times].
Table of Contents:
- 1. Why Privacy Token?
- 2. Review of Privacy Tokens
- 3. Privacy Token Economics
- 4. Dilemma — Regulatory Surveillance vs. Privacy
1. Why Privacy Token?
Blockchain is a network allowing peer-2-peer transactions without authorities while keeping transaction counter-parties anonymous. Privacy is the ability of an individual or group to seclude themselves, or information about themselves, and thereby express themselves selectively. However, every transaction is broadcasted and viewable to all on a public ledger. Based on transaction pattern of certain wallet with known identity, the account owner can be profiled using social engineering. Just like in movie Ready One Player, “no one tells his real name in the Oasis!”
For Privacy, it means several things as follows and PRIVACY MATTERS in blockchain. The following table summarizes major privacy token functionality.
- Sender Privacy [Wallet/Address Privacy]
- Cryptographic Privacy [Transaction Privacy]
- Balance Visibility [Data/Content Privacy]
2. Review of Privacy Tokens
There have been a few privacy tokens using different technology to address privacy issues mentioned above, including Dash, Monera, Zcash. There have been a few others, including PIVX, Grin, Verge, NavCoin. Also, traditional tokens, such as LTC, contemplate adding privacy features to the token to gain some comparative advantage as key player for transaction and payment. This section will discuss each privacy token individually.
2.1 Dash (DASH)
DASH was founded after a Bitcoin fork in 2014 and is not cryptographically private. Dash guarantees security through Mixing, using an adjusted variant of CoinJoin — a strategy at first made to “anonymize” Bitcoins. Dash is a Proof-of-Work framework that has two kinds of hubs on the system; masternodes and diggers. Masternodes give moment send and private send capacities.
CoinJoin is a technique to anonymize exchanges proposed by Gregory Maxwell. CoinJoin depends on the standard of collection together exchanges to make joint installments. CoinJoin-based blending techniques increment security for all clients since it is never again likely that all contributions to an exchange originate from a solitary wallet, and henceforth can never again be dependably connected with a solitary client.
2.2 Monero (XMR)
Monero is considered one of the best privacy cryptocurrencies in the cryptocurrency space. Created from a hard fork by Bytecoin in 2014, Monero uses encoded transactions that hide both the addresses and the quantities transferred, also adding fraudulent transactions that make it impossible to know the contents of the operations.
The coding has used Ring CT to maintain an anonymous transaction and wallet. The team also integrated Tails, an operating system passing transactions through the TOR network, to further protect privacy.
In addition, Monero also uses a network of stealth addresses to allow users to hide their wallet address. A stealth address is a one-time use address that is created for every transaction. Monero users also have a public address that is published on the blockchain, but most (if not all) of their transactions will be passed through unique stealth addresses.
Basically, Dash groups up small transactions while Monero breaks down into small transactions for privacy. Therefore, Monero heavily relies on network resources. They are different from Bitcoin in that regular PC can run Monero’s node service.
2.3 Zcash (ZEC)
Zcash is another Bitcoin-forked privacy coin with privacy features using zk-SNARKs. zk-Snarks, aka Zero-Knowledge Succinct Non-Interactive Argument of Knowledge, is a technology to allow miners to verify transactions without knowing who sent/received the coins. The protocol team has implemented zk-Snarks on Quorum for JP Morgan, which is an enterprise-focused version of Ethereum. The team has worked with other teams to add the privacy feature to their project/platforms.
2.4 PIVX (PIVX)
PIVX is a re-brand of the Darknet Coin, and stands for private instant verified transaction. PIVX is a fork from Dash, implementing Bitcoin Improvement Proposals (BIP), and utilizing PoS to secure the network.
PIVX users are allowed to run master nodes with at least a stake of 10,000 tokens (while Dash only requires 1,000 DASH).
2.5 GRIN (GRN)
Mimblewimble is a new privacy-focused blockchain project that is based on Bitcoin’s design. On July 19, 2016, “Tom Elvis Jedusor” dropped the whitepaper into a Bitcoin research channel and disappeared. Later, “Ignotus Peverell” started a Github project called Grin and began turning the Mimblewimble paper into a real implementation.
Mimblewimble/Grin is an improvement upon confidential transactions and CoinJoin from Bitcoin. Key features include no public addresses, complete privacy, and a compact blockchain. There has been a lot of excitement around Grin mining lately since Grin coins, like Bitcoin, can only be created through PoW mining. Grin uses the Cuckoo Cycle PoW algorithm, which was originally designed to be ASIC-resistant but is now considered to be ASIC-friendly.
Key Features of Grin:
- Complete privacy as its default
- Scalable transactions
- Tried and tested cryptography
- Easy design for person to person transaction
- Community-driven — aimed at decentralized advancement and mining
2.6 Verge (XVG)
Verge Coin started its journey as DogeCoinDark in 2014, named after the world’s most popular meme cryptocurrency. In 2016, the coin was rebranded to Verge Cryptocurrency, and has since been gaining enormous traction in technology and investment communities.
- Verge coin is mineable. But Verge miners can choose one of three mining methods to get their Verge, rather than the expensive and limited options afforded to Bitcoin miners.
- Verge allows for everyday payments. But where Bitcoin payments are not anonymous, Verge coin transactions are masked with TOR and i2P, for fully private transaction.
- Verge is decentralized money. But Verge is also in the process of adding smart contract functionality, allowing it to develop for the needs of the world better than Bitcoin.
- Verge has several key partnerships, including porn industry giant MindGeek, whose subsidiaries include Pornhub and Brazzers.
2.7 Litecoin (LTC)
Litecoin is getting tired of standing in Bitcoin’s shadow. After many years as Bitcoin’s second fiddle, Litecoin core developers are getting more interested in following the likes of privacy coins such as Monero (XMR) and Zcash (ZEC).
Charlie Lee opened a discussion on fungibility and hinted at the addition of Confidential Transactions in a “future release of the full-node implementation” in 2019. This will let LTC gain more comparative advantage as media of transaction and payment.
2.8 NavCoin (NAV)
NavCoin is a decentralized cryptocurrency that was forked from Bitcoin. It aims to solve 2 problems that are typically found in blockchain platforms:
- Data is made public on the blockchain, leaving it vulnerable to malicious attacks by illicit users.
- Most blockchains use “roll backs” as the solution to data vulnerability. They reset the blockchain to a backed-up point after a data breach, meaning transactions made leading up to the roll back are erased.
The NavTech system is a combination of the traditional Bitcoin blockchain and a NAV subchain. Using two chains allows users to send transactions with complete anonymity.
Cloak is a veteran privacy coin that is growing slowly, although it has been active in the privacy niche for approximately 4 years. The blockchain is operated using a Proof-of-Stake consensus protocol. It has relatively short blocktimes and quickly processes transactions.
The platform also offers 2 different methods of making your transactions untraceable. First is their onion-routing privacy protocol. Onion routing involves encrypting messages with many layers (similar to an onion).
It also offers the Enigma process to provide additional privacy cloaking on transactions. Enigma cloaking is applied when a user requests a cloaked enigma transaction.
2.10 Enigma (ENG)
The Enigma project is entirely separate from the Enigma cloaking process used in CloakCoin transactions. Enigma is not a cryptocurrency nor a blockchain; instead, it is a privacy protocol that can be deployed on blockchains and decentralized applications. Therefore its token, ENG, is a distinct addition to the list of top privacy coins.
The Enigma network provides privacy by making nodes unable to see the data that they compute. Although they are unable to clearly see exactly what they are working on, these nodes are still capable of verifying that their computations have been run correctly. With the data masked like this, Enigma hopes to open the door for what they call a new type of smart contracts — “secret contracts” — wherein the underlying data processed in a smart contract remains encrypted at all times.
DeepOnion is a new privacy coin project that is generating some interest in the community. Like a few of the other coins in this list, DeepOnion uses TOR to send untraceable transactions. It also uses a mix of Proof-of-Stake and Proof-of-Work protocols to offer fast confirmation times.
DeepOnion also employs stealth addresses to keep transactions private. The DeepOnion team is currently working on DeepSend and DeepVault. DeepSend will use a multi-signature method to prevent payments from being traced. DeepVault is an information storage service that allows users to store data in the blockchain forever. In order to verify the integrity of a file, a user only needs to compare their current version of the file with the backup. This can be beneficial for the purpose of verifying the integrity of important documents.
Zencash is more than a privacy cryptocurrency because it also contains a messaging platform, a Distributed Autonomous Organization (DAO). Users can send tokens anonymously (“Z” address) or pseudonym (“T” address). Even Zencash, a hard fork by Zcoin, wants to make an exchange with the same degree of privacy.
Zcoin also uses the Zerocoin protocol. Zcoin is burned in a Zcoin transaction and Zerocoin are created and transferred, but since they have no history, they are not traceable. This costs a 0.01 Zcoin fee. Those who receive money only know that they have received them.
2.14 Bytecoin (BCN)
Bytecoin is probably the oldest cryptocurrency to deal with privacy problem, given that its birth dates back to 2012, but has recently had a flashback. As a security system, it combines a Stealth system for addresses joined to the Ring CT, with a protocol called Cryptonote. This privacy token is the father of Monero.
2.15 Bitcoin Private
Bitcoin Private comes from a hard fork and a fusion, i.e. a hard fork of Bitcoin and then a merger with Zclassic, in turn, hard fork of Zcash in which the prize for creators was canceled. Bitcoin Private also implements the zk- Snarks.
2.16 SpectreCoin (XSPEC)
Spectrecoin (XSPEC) was created in December 2016 as a fork of ShadowCash (SDC), with its initial difference being that it ran over the tor network for added privacy. Since then, it has continued to make strides, developing into an even more user-friendly and anonymous cryptocurrency. These advancements include OBFS4 Bridges, Wallet UI improvements, improved stealth addresses, updated tor, and better syncing. At just over a year old, the project has come a long way and has big plans for the future, such as stealth staking (a first for any crypto) and the implementation of Android and iOS mobile wallets.
- Tor to hide the location and make tracking more difficult
- Stealth addresses to keep the receiver anonymous
- Ring Signatures to keep the sender hidden
3. Privacy Token Economics
Due to different technology stacks to realize the privacy features, the token economics designs can be different to incentivize various ecosystem stakeholders. In this section, we will discuss the different token economics design for DASH, and Enigma Protocol.
First, let’s summarize some techniques used by Privacy Token.
- CoinJoin — Join multiple transactions a group so that the transaction cannot be linked to a single wallet/address. It is a Mixing-based privacy solution.
- TOR Network — TOR make the transaction untraceable. Another way to understand TOR is VPN. It transacts using multiple layers of proxy to hide the identity behind the transaction counter-parties. [check the 2-min video here]
- i2P — The Invisible Internet Project (I2P) is an anonymous network layer (implemented as a Mix Network) that allows for censorship-resistant, peer to peer communication. Anonymous connections are achieved by encrypting the user’s traffic (by using end-to-end encryption), and sending it through a volunteer-run network of roughly 55,000 computers distributed around the world.
- RingCT — RingCT stands for Ring Confidential Transactions, makes transactions harder to trace by obscuring the output of the true sender in a set of n other outputs on the blockchain, indistinguishable with respect to their amounts. It is a Mixing-based privacy solution.
- Stealth Address — Stealth Address means that the created stealth address will be used only once for the transaction. That being said, each transaction corresponds to one stealth address, which makes it impossible to link the transactions to single wallet/address.
- zk-SNARKS — zk-SNARKS stands for Zero-Knowledge Succinct Non-Interactive Argument of Knowledge. It is a cryptography algorithm to verify the transaction without revealing the address and balance.
- Mimblewimble — Mimblewimble uses elliptic-curve cryptography that requires smaller keys than other cryptography types. In a network that is using the Mimblewimble protocol, there are no addresses on the blockchain, and the network’s data storage is highly efficient.[a quick example]
Dash works a little differently from Bitcoin, however, because it has a two-tier network. The second tier is powered by masternodes (Full Nodes), which enable financial privacy (PrivateSend), instant transactions (InstantSend), and the decentralized governance and budget system. Because this second tier is so important, masternodes are also rewarded when miners discover new blocks. The breakdown is as follows: 45% of the block reward goes to the miner, 45% goes to masternodes, and 10% is reserved for the budget system (created by superblocks every month).
As of February 2019, the holders of DASH that run a masternode receive ~ 7% annual block rewards. https://masternodes.online/currencies/DASH/ is a great resource for real-time DASH network metrics.
The current block reward is 3.35 DASH, or 1.5075 for miners, 1.5075 for masternodes, and .335 DASH for the DAO per block. Dash features a block interval of ~ 2.5 minutes and ~ 550 blocks per day.
Each masternode requires 1,000 DASH as collateral. The 1,000 DASH are used as bonded collateral and required to earn the inflation funded block rewards. The collateral is always safe and never forfeited during masternode operation.
Since masternode rewards are fixed at 45% of the block reward, or 1.5075 DASH per block, and the number of active masternodes on the network is dynamic, expected masternode rewards will vary according to current total count of active masternodes. Masternodes are currently yielding ~ 7.01%.
The average Dash masternode reward frequency is just shy of nine days.
Enigma is a protocol related to process information securely. Its token must be purchased in order to run a node on their network. After buying the Enigma token, you can receive rewards for processing data. But in order to process data, each node must make a security deposit. If the data is tampered during the verification process, the deposit will be split between any nodes that processed the data without error.
In effect, owning ENG allows people to get started using the network. ENG also serves as a reward for participation in the network.
Other factors affecting the Token Economics include: randomness of miner/node selection, front-cost of providing mining service (e.g., ASIC vs. PC) and also coin reward number and coin prices.
4. Dilemma — Regulatory Surveillance vs. Privacy
Recently, there have been different voices on SEC approving BTC ETF proposals. For people who don’t think it will come soon [Brian Kelly].
Over 2018, the SEC has received multiple Bitcoin ETF applications from various players, such as the Winklevoss twins, but is yet to approve any one of them. Expanding on his point of view, Kelly said that the agency is unlikely to change its opinion in the near future, as “there is too much that is unresolved.”
SEC officials have demanded better cryptocurrency surveillance and custody before approving BTC ETF applications for multiple reasons:
- Concerns about hacking events and market manipulation
- Concerns of money laundering without transaction traceability
- Concerns of linking transaction with wallet/address for taxation reasons.
Here is the dilemma between regulatory surveillance vs. privacy. Until a balance/compromise is reached, the next bull market might be delayed as long as possible.
All of the information of projects are sourced from online materials and do not necessarily reflect the current state of the projects. The information here does not constitute any advice on investment or consequence of any investment.