Monero and privacy coins

Wonder

1. How can a network verify that money was spent without seeing who spent it or how much?
2. Why does adding more data to hide identity often make the ledger slower and heavier?
3. What happens when a privacy feature requires trusting a specific group of people with its keys?

Explore

1. Bitcoin offers pseudonymity, not anonymity. Public keys are not tied directly to names, but every transaction is recorded permanently on an immutable ledger. This permanence allows for de-anonymization through public key analysis; linking a single address to a known identity reveals the entire financial history of that user. Privacy coins emerged to build privacy into the base protocol itself.
2. Monero employs ring signatures, where a spender mixes their input with decoys from other transactions on the ledger. The actual sender is hidden among these decoys, giving the real input plausible deniability among the ring members; researchers showed that many early transactions, before 2017, could still be traced by heuristics. One-time stealth addresses hide the recipient, and since January 2017 RingCT has hidden amounts; in 2019 Monero adopted the RandomX proof of work to favor ordinary CPUs. Monero launched in April 2014 as a fork of Bytecoin, whose large hidden premine had been controversial. The privacy costs space: Monero transactions are much larger than bitcoin’s.
3. Zcash, launched in October 2016 from the academic Zerocoin (2013) and Zerocash (2014) research, uses zk-SNARKs (zero-knowledge succinct non-interactive arguments of knowledge). Unlike Monero’s obfuscation, Zcash allows nodes to validate transactions without accessing the underlying data. However, its original parameters required a ‘trusted setup’ ceremony where multiple parties generated keys while destroying their own copies. Critics objected that users had to trust the ceremony; a 2022 upgrade moved Zcash to a proof system (Halo 2) for its new Orchard pool, which needs no trusted setup, though older pools remain in use.
4. The tension between privacy and regulation is structural. Privacy by obfuscation adds information to obscure data, complicating network processing and raising regulatory concerns regarding illicit activity. Conversely, ‘privacy by omission,’ seen in second-layer solutions like the Lightning Network, reduces on-chain information. This approach can improve both privacy and scalability simultaneously by keeping transaction details off the main ledger.
5. Dash, launched in 2014 as XCoin and later Darkcoin, used coin mixing and ‘masternodes’ to obscure transaction paths. It was criticized for an early ‘instamine,’ a rapid issuance of coins that favored early developers. Regulatory pressure has since led exchanges to delist privacy coins in some jurisdictions; for example, Binance delisted Monero in February 2024.
6. The ideological roots trace back to the Cypherpunk’s Manifesto (1993) and to David Chaum’s work on private digital cash. Implementation remains difficult due to a mixture of security challenges, user experience hurdles, and intense regulatory pressure from governments seeking surveillance capabilities. The trade-off is clear: absolute privacy requires cryptographic complexity that most users never understand.

Key facts

Exercise nine, six, three, one

Fact check

Dates, figures and claims checked against the published sources listed below.

• Nicolas van Saberhagen, CryptoNote v2.0 white paper (2013)
• Ben-Sasson et al., 'Zerocash: Decentralized Anonymous Payments from Bitcoin' (IEEE S&P 2014)
• Eric Hughes, The Cypherpunk's Manifesto (1993)
• Monero documentation on RingCT and RandomX
• Binance announcement regarding Monero delisting (February 2024)