Before we will take a look at privacy techniques and strategies. Let’s first take a look at Bitcoin though and see how it introduced early privacy techniques. Bitcoin does not give you anonymity, it simply masks you and does not show your real identity. But since the Bitcoin blockchain records every transaction, tracking the transactions is not challenging, and you can easily find which address sent crypto to which one. While it does not show your name or face, it still shows your wallet address and people know how much you hold, what you sent and where, etc. 

When people hear about this, they come to the conclusion that they can own multiple wallets and that it will be impossible to track how many Bitcoins they have and where they are transferring them. At first, it was a good idea to use multiple wallets in order to hide one's identity, but as time went on people started to find ways to track multiple wallets to one user. This is called wallet clustering where users cluster multiple wallets together and looking at different data, they can connect wallets together. 

We can see that the Bitcoin system fails to deliver perfect anonymity and privacy, but this does not mean there is no way to achieve this goal. The crypto space is very competitive and if one product can not deliver what people want, someone else will. Because of this, there have been multiple different techniques developed to achieve security and anonymity when making crypto transactions. Some of these methods need to be done by hand, but there are also special private cryptocurrencies, which are developed in a way that keeps users' information fully private. Let’s take a closer look at these security and anonymity techniques. 

Coin Mixing

One of the most popular ways of masking your crypto transactions and remaining private is through coin mixing. As the name suggests, this method involves shuffling cryptocurrencies which makes sure that owners of these coins become untraceable. 

This process involves people sending their cryptocurrencies to a mixer, which then mixes cryptocurrencies together and then sends them back to new addresses. For example, if you own 1,000 USDT and send it to a mixer, this mixer will also receive USDT from others and then will mix these coins together. After this, the mixer will send your 1,000 USDT to your new address and since coins have been mixed, it will be impossible for someone to track your transactions. 

Ring Signatures

Another popular way of keeping anonymity and unlinkability when making crypto transactions is by using ring signatures. When crypto transactions are made, the blockchain will need a signature that confirms the transactions. In most cases, these signatures are public, and it is easy to trace who signed the transaction. But ring signatures remove this traceability and create anonymous signatures. 

Ring signatures combine one-time signatures from the original sender and past signatures pulled from the blockchain. When a transaction is made, the signature that signs this transaction is a combination of all of these signatures. This makes the sender's signature indistinguishable from decoy signatures pulled from the blockchain.

To better understand this let’s look at the example. Let’s say you are sending a cryptocurrency to someone and want to use a 5-level ring signature, meaning it will be sent as a combination of 5 signatures. When a transaction is sent, the system will take your one-time signature and will pull 4 random signatures from the blockchain. The system then makes a transaction and shows 5 different outputs where it’s not shown who was the original sender. The original signature coming from you will not even be visible to the recipient, let alone the third party. 

Zero Knowledge Proof

Zero-knowledge proof is a mechanism that lets you prove that you know a piece of certain confidential information without actually revealing this information to anyone. In order for this system to work it relies on algorithmic tasks that look through certain data and simply return true or false results. 

When the input is valid the system will always return a true statement and if the prover and verifier act honestly, the input can be accepted and proven. If the input is invalid it will return false, and it’s impossible to fool zero-knowledge protocol. Because of this, the prover can't trick the system into returning true if the input is invalid. 

When a zero-knowledge protocol is used it uses randomly selected questions, which are used for verification. The verifier starts to ask random questions to which the provider needs to provide answers. The prover starts calculating the data and after completing the process it sends out the answer. But, in order to make sure that the prover is not guessing the answers at random, verifiers ask more questions. After the prover answers more questions and the verifier is satisfied with the answers, the transaction is then verified and sent. During this time, the verifier does not receive any information regarding the transaction, who sent it, where it was sent from, and so on. 

We looked at some of the different mechanisms that can be used to stay anonymous when dealing with cryptocurrencies. But applying these mechanisms ourselves can be very challenging and tricky, especially if we are not very familiar with blockchain and how it works. But this does not mean that if you don’t have this knowledge, you can’t stay anonymous. There are cryptocurrencies that implement these mechanics into their code and let anyone using them stay anonymous. Let’s take a look at some of the most popular and best ones.

Monero

As the biggest private cryptocurrency on the market, Monero offers private transactions to anyone who owns their crypto. Monero has the biggest market capitalization out of every cryptocurrency that is considered private and is currently valued at around $2.5 billion. 

Monero implements multiple different mechanisms that make sure to keep transactions private and anonymous. It uses a combination of ring signatures and stealth addresses, which are one-time-generated crypto addresses. When cryptocurrencies are sent on Monero, they are sent to a one-time generated stealth address, which then redirects these cryptocurrencies to the real address. When doing so, it’s only possible to see that it was sent to a stealth address, and the actual address is never shown. 

But being the largest private cryptocurrency would not have been possible if Monero just hid the receiver. When making transactions on Monero, both sender and receiver remain anonymous and no one knows who sent crypto to where. The receivers are protected with stealth addresses, while receivers are protected using ring signatures.

It’s also important to note that Monero is an open-source network. What this means is that people who understand how code works can check whether Monero actually does implement these features and how effectively it implements them. Monero transactions are also private by default and you don’t have to go and activate private transactions, which can not be said about most other private coins. 

Dash

Dash is a Bitcoin fork that offers a great level of security and privacy to people who own this cryptocurrency. Being the second largest private cryptocurrency after Monero, Dash primarily uses coin mixing to offer anonymous transactions. 

When using Dash, the private transactions are not a default option and you need to select the PrivateSend feature in order to make private transactions. Once selected, you can send your cryptocurrencies anywhere and you will not leave any traces behind. When sending Dash, your cryptocurrencies are mixed together with other transactions. After this, the designated wallet receives the amount sent, but since this was sent from a mix of multiple transactions, it’s impossible to see exactly who sent this cryptocurrency. 

When using Dash, you can mix your cryptocurrencies 2 to 16 times, and the more you mix the more private your transactions become. Dash is also an open-source network and you can check the validity of the code anytime you want. 

Zcash

Another very popular private cryptocurrency on the market is Zcash. Just like Dash, Zcash is a Bitcoin fork and it uses a zero-knowledge proof mechanism to make transactions anonymous. When making transactions using Zcash, you are not sending information such as your wallet address or anything sensitive that is needed for transactions. Zcash uses complex mathematical equations to verify that these are actual transactions and it does not reveal anything. 

When using Zcash and its zero-knowledge proof system, you can hide all of the sensitive information from prying eyes. You can hide information such as your wallet address, the recipient's wallet address, and even the amount of cryptocurrencies you are sending. 

Like the previous two cryptocurrencies, Zcash is also an open-source network and if you can understand code you can check Zcash's source code on GitHub. 

The crypto and blockchain ecosystem is growing rapidly and we are seeing new advancements each day. When Bitcoin was created, it always had privacy as one of its main goals, but as we know, achieving full privacy for Bitcoin is impossible. This is why these crypto advancements have brought forward fully anonymous cryptocurrencies that hide practically everything. But is it actually a good thing and is there a future for these coins?

Having full anonymity is something that many people want but if we take a closer look, the best solution might be a balance between anonymity and transparency. One of the first challenges to anonymity is regulators who ask for certain information in order to make sure that the market is safe and no one is abusing it. Also, there is a problem with criminal activities. Yes, it’s good to have an option of fully anonymous and private transactions, but the ones who benefit the most from this are criminals. These criminals can move around their money and remain completely hidden, which is something that no one wants. All in all, there is definitely an infrastructure for full anonymity and privacy, but actually developing and adapting this system might pose a very big challenge.