How do I obtain privacy on the blockchain? The most important methods explained.

One of the key factors defining the success of cryptocurrencies is the anonymity they provide. Indeed, to create a BTC wallet you don’t need to provide any personal IDs, to send funds to another user you don’t need to know his or her name, address, or phone number, to register in a dApp you don’t even need an email (in most cases). Moreover, the Silk Road, that ill-famous platform successfully selling illegal instances for several years, was relying on Bitcoin as the key means of payment.

However, Bitcoin’s anonymity is not absolute. Wallets’ balances, size of transactions, addresses of participants – all this information can be easily obtained on the web thanks to the full transparency that this method provides.

In the conditions of ever-growing globalization and governmental control that only tends to get tighter throughout the years, even law-abiding citizens would appreciate having an anonymous payment option. In this article, we are going to review some of the most popular methods to increase Bitcoin’s anonymity and a few altcoins that set this feature as their unique selling proposition.

3 key approaches to increase Bitcoin’s anonymity

Purchasing bitcoins from your verified account on an exchange is just like going out into the public square and declaring your intentions out loud for everyone to hear. As it has already been mentioned above, with the transparency provided by the blockchain, tracking down your identity would be as simple as 1-2-3.

Yet it’s not that bad. Here’s what you can do to make your payments more anonymous.

  1. Hide your IP address.

When you launch a transaction in the Bitcoin network from your PC, it is sent to one of the nodes for registration. The nodes in their turn can easily track and record your IP address. 

These nodes don’t necessarily have to be maintained by malefactors, of course, and most likely nothing bad would happen. However, it is still wise to use VPN or Tor to hide your traces.

  1. Use different wallets.

It’s never good putting all eggs in one basket. Use different wallets for different operations, this would make the task of allocating your identity much more complicated. BTC wallets are easy and free to set up, so don’t neglect this option. Moreover, some wallets such as Jaxx, for example, do that automatically saving your time and effort.

  1. Use mixers and tumblers.

These are special services that accept identifiable BTC transactions, mix them up in a random way, and spread across different addresses to obscure the transaction trail. 

When selecting a mixer, check if it has a different number of inputs and outputs and if it provides a time delay feature to prevent blockchain analysis from backtracking transactions. Also, keep in mind that exchanges do not favor such services, so you will need to find a way to set them up on your own end.

Privacy-oriented altcoins

Thanks to Bitcoin’s open code, a plethora of altcoins has been released, some of which are focusing on improving privacy in crypto. At the time of writing, Cryptoslate lists more than 70 of those with a total market capitalization of nearly 10 billion USD. Below, we are going to review the veterans of this segment that have managed to live through many bearish cycles of the market and are still afloat.

Monero

Monero (XMR) was initially launched as a fork of Bitcoin in 2014. It has lived through thick and thin and can now be considered as one of the most reliable privacy solutions among all privacy coins.

The coin relies on the protocol Cryptonote that was proposed by a presumably anonymous user with a nickname of Nicolas van Saberhagen in 2013. Another user from Bitcointalk with the nickname “thankful_for_today” turned Saberhagen’s ideas into reality by creating Monero.

Cryptonote relies on the following features that enable full anonymity and untraceability for Monero users:

  • Ring signature. When spending bitcoins, each transaction is signed by 2 parties: the one that sends and the one that receives the coins. Their signatures are registered on the public ledger and make them fully visible in the chain of transactions. With Cryptonote, each transaction must be signed by a larger group of users (usually 5) making it impossible to identify a sender and a recipient.
  • Stealth addresses. These addresses represent secret mediators that stand between a sender and a recipient. They are invisible to everyone except for the participants of a transaction and add an additional layer of privacy.
  • Ring Confidential Transactions. Finally, by implementing this technology, Monero allows its users to hide the amount of funds they send.

Another upside of Monero is the size of the network fees that users have to pay. In October 2018, the team introduced a hard fork that enabled the reduction of fees from $0.6 to $0.02 per transaction.

BitInfoCharts: Having reached their peak on December 17th, 2017, XMR transactions fees drastically decreased after the hard fork and still hover around $0.05 per transaction

Dash

This is another privacy-oriented coin launched as a fork of Bitcoin in 2014. As it still remains in CoinMarketCap’s top 100, one can make assumptions about the reliability of the project.

Dash utilizes the Private Send feature that in fact represents the mixer that we mentioned above. It splits every transaction into smaller parts, processes them through random addresses to mix them up, and then puts them all back into a single sum to reach the recipient. This makes it near to impossible to trace the funds and helps users hide their traces in the network.

However, there is a flaw that makes Dash not as privacy-focused as one may desire it to be. The masternodes that support the network can still trace all transactions, and the cost of setting up such a node is only 1,000 DASH (~$14k at the time of writing) which should be locked as collateral. Thus, if the need arises, authorities could easily deanonymize Dash users.

ZCash

Launched in 2016, Zcash relies on a cryptographic tool ZK-SNARKS which is a variation of zero-knowledge-proof technology serving to make transactions more private. Its approach implies verifying transactions without revealing the identity of participants or the sums they exchange.

To make transactions private, users can select to shield their addresses, though this feature is optional and is supported by just a small handful of wallets. Moreover, the statistics show that the demand for this feature remains pretty low. At the time of writing less than 10% of all transactions are sent privately.

ElectricCoin: The number of fully shielded transactions on Zcash grows but very slowly

The weakest link in your privacy

The list of cryptocurrencies aiming to provide you with privacy keep growing which shows that the feature is required by the public. However, don’t forget that the crossroads of crypto and fiat represent the most trustworthy way to deanonymize any user on the web.

Sending crypto to Binance to convert it into another coin? Be sure that the exchange knows all about you and is capable of linking your address with your personality. Buying something on the web for crypto? To receive the goods you will anyway have to provide your real address. Buying crypto with a bank card? Well, there’s nothing more to say here.

Indeed, cryptocurrencies provide anonymity for the digital cash that no one could ever have dreamed about before. However, it’s worth remembering that even cryptocurrency owners can be anonymized, so one should use additional methods to maintain his or her privacy.