Blockchain and the Future of Digital Privacy: Why Privacy Must Go Beyond Transactions

The internet is in a delicate state. It has become an indispensable part of our private, professional and financial lives, granting the masses capabilities that preceding generations would envy.

But that has come at the cost of conceding our freedom to the handful of powers that dictate how we may act and what we can do with it. Our over-reliance on the internet has exposed us to malicious agents of all kinds, from hackers to state actors, but a line has been crossed — it’s inconceivable to see ourselves return to a time before the internet.

Our only choice is to move forward, looking towards the fairer playing grounds of decentralized networks, for a platform where our own choices and motivations, not that of centralized powers, have the final say in deciding how an information platform like the internet can operate.

This is the impetus for the “Web 3.0” revolution, a utopia that several teams hope to achieve with decentralized technologies.

The ideal internet would put privacy at the forefront, allowing us to communicate freely, without fear of repercussion, without worry of having our purchasing data traced back to us, and without fear of judgement.

Privacy is a right that must extend to all parts of our existence, but this is not what we have at the moment. Our data is a commodity that is used against our favor, and often without our permission, to cement the power of monopolies that grant us services “for free” — if we consider personal data to be of no worth, that is.

Privacy coins, which are at heart of this ethical debate, are one of the most hotly debated issues in the cryptocurrency market. Unlike many other coins, they rile up all of the powers in charge, from tech monopolies to governments to banks, thanks to their potential to pull the rug out from underneath them and invert the flow of power.

As privacy coins mature and adapt, entrenched powers might react threateningly. Tech companies have the power to ban us from a service that has become essential, and financial institutions have the power to take our own money out of our accounts – with this possibility growing ever more apparent, we are forced to look for alternatives.

Projects are considering several different approaches to granting users complete privacy, but all are not equal. It will be interesting to see how these coins fare against each other and their distinctions.

Before we dive into the various privacy tokens, an important point must be made, which we discuss in detail later: these coins give us privacy in a very limited sense.

They protect our financial behaviour, but not any other kind of activity on the internet. Even with the most respected of these projects, like Zcash and Monero, it has been proven that through transaction pattern analysis and social engineering, it is possible to deduce some information about the participants.

To earn the title of “privacy project,” it must extend beyond transactions, and this is something projects are not targeting.

Still, this may be a stepping stone for new projects and teams to develop a project with a grander ambition and more robust platform, which we may come to see in the next few years. Blockchain and cryptocurrency is, after all, in the early stages.

Now let’s go over the major privacy coins.

Monero (XMR)

Monero is one of the earlier projects to take on the purpose of private transactions, and has received the attention of experts like Antonopoulos. It uses several methods like Ring Signatures, Ring CT, stealth addresses and CryptoNote to offer a greater degree of privacy.

CryptoNote, in particular, is interesting — it is a layer built on top of the blockchain protocol that many privacy projects use to enhance privacy. Features of the protocol include untraceable and unlinkable transactions, and proof that double spending hasn’t occurred.

Despite the large safety net of privacy techniques that Monero is throwing on transactions, it is not foolproof. Researchers from several institutes have managed to trace individual transactions.

Andrew Miller (who advises Zcash), from the University of Illinois, states that it is possible to reveal information that is not secured by Monero’s cryptography. That said, Monero is a work in progress, and is much further ahead than its competitors.

Dash (DASH)

Dash, though it has shifted away from its intentions to be a privacy coin and suffered from development delays, is still considered one of the major privacy coins. It is a fork of Bitcoin, but offers faster and, of course, more private transactions.

The key technology supporting Dash’s privacy is its PrivateSend feature, which operates on the CoinJoin technique. This is not cryptographic privacy, which makes it weaker in comparison to other coins here.

In a nutshell, it mixes transactions from multiple users to hide the origin of the transaction. Worryingly, users are required to trust a centralized service to handle the mixing of coins. Furthermore, MasterNodes which enable the mixing process could theoretically be exploited to reveal transaction details.

But here’s the really sinister problem. Dash’s block-rewards system is structured as follows: 45% is allocated towards the miners, another 45% towards MasterNodes and the remaining 10% to the governance system.

This lends itself to supply centralization, with MasterNodes and Miners accounting for a large part of the economy. It takes 1,000 tokens to run a master node, of which there are already many thousands.

The total supply of Dash is just under 19 million. Masternodes users alone would account for a significant fraction of the economy. The real kicker is that each MasterNode gets one vote, so the more MasterNodes that are run, the more power an individual or group gets, creating financial inequity.

All of this comes together to give MasterNodes far too much influence on the network, and making one doubt its value as a decentralized network. Transactions may be fast, but from a privacy perspective, DASH is not a suitable option. Especially when you consider that there are stronger options already available.

Zcash (ZEC)

Among the coins talked about here, Zcash is arguably the one with the most potential, despite having to overcome some technical hurdles to achieve superiority.

Zk-SNARKs is well-known as a highly effective technique that offers anonymity for the sender and the recipient, as well as hiding the transaction amount. It appears to be the strongest way forward to ensure anonymity in transactions.

However, it does come with a catch — the processing requirements of zk-SNARKs hinders scalability (private transaction processing requires much computing power), so the team will have to put considerable effort into solving this challenge. It also remains largely untested. Bitcoin Core developer Peter Todd also had some reservations about Zcash’s security which, because of its relative novelty, requires auditing.

In fact, Zcash’s founder Zooko himself admits that Zcash is built on a new technology and comes with risks. He also considers it to be more “general purpose internet money” than privacy coin:

FWIW, Zcash isn't a "privacy coin"; it's general-purpose internet money. Privacy is just one requirement for any successful internet money. — zooko (@zooko) August 28, 2017

PIVX

PIVX uses the Zerocoin protocol (which is an earlier version of Zcash’s protocol) to hide the origin of transactions.

However, it does not hide the transaction amount. There are tradeoffs between the protocols, with Zcash being vulnerable to hyperinflation. Zerocoin comes with risks itself, with researchers proving that it is possible to burn coins of users.

A bigger problem has been the development hiccups that have occurred with the release of zPIV and the wallet. The former has led to some consensus issues, while the latter has users complaining about malfunctioning wallets.

The team has addressed this, but there is no doubt that much refinement is required. PIVX is one of the more recent privacy coins, having launched in Q1 2016, so they could be granted some leeway as far as development is concerned. In the short time of their existence, they have completed some important features, such as Zerocoin Proof-of-Stake (zPoS) protocol.

While it may not be the most effective way to ensure privacy, and while there are risks, PIVX at least operates on a PoS consensus (the first associated with Zerocoin), which gives it some level of fairness in governance — unlike Monero and Zcash.

Spectre Coin (XSPEC/SPECTRE)

SPECTRE, launched in Q4 2016, is the youngest private coin on this list. It offers privacy through a dual coin system — one coin acts normally, functioning just like Bitcoin, but the other, SPECTRE, offers apparent total anonymity.

Like Monero, it uses Ring Signatures to achieve anonymity and is therefore accompanied by its effectiveness and shortcomings. Spectre Coin also has a built-in TOR facility.

This direct integration with TOR, or “The Onion Router,” routes activity through multiple nodes that shield a user’s presence on the internet. All Spectrecoins are necessarily part of the TOR network — the Spectrecoin network can only be accessed via their .onion addresses and communication between nodes is encrypted at all times.

The reservation with the SPECTRE project is that it is far too early to tell whether it’s of any significance. There isn’t even a whitepaper out yet. The lack of peer-reviewed papers, unlike Zcash, and any demonstration of use creates a void of compulsion as far as investing in the project goes.

All that we have at the moment is the hope SPECTRE will make good on its potential and deliver tangible results in the near future.

Projects with Comprehensive Solutions are What We Need

It is remarkable that there are so many projects out there that are attempting to create truly private transactions. There is an awareness that it is necessary and for the first time, outside of the inconvenient method of cash, we have a way of establishing financial — and by extension personal — privacy.

The news is good, but the reality is far from ideal. The niche is currently quite disparate, with ideas that are hopeful but not guaranteed success. The infrastructure for a private, open, flexible platform, where private transactions have a logical place is yet to have manifested.

The lack of a comprehensive solution to the problem of privacy is notable, and what the cryptocurrency market needs to entrench itself in mainstream use is the kind of token that can serves multiple functions in our daily lives, just as money does. It is more likely that people will latch onto a dozen or so flexible tokens that will do well as opposed to hundred single-purpose ones.

There’s a more significant problem at hand — most of these projects don’t actually tackle the larger context of digital privacy.

Our financial transactions — which is essentially the movement of what we consider valuable — are records of our lives, but our digital lives encompass much more than purchases.

The sites we visit, the applications we use, the reviews we leave, and the cloud services we utilize all paint a picture of our identities, which in the current state of the internet is easily exploitable and vulnerable to theft.

That is the major void in cryptocurrencies, which often posit that they will usher in an age of complete privacy for the individual. The entire discussion has revolved around coins giving us financial privacy, not addressing the fact that the technology and resources exist for us to establish a platform that provides comprehensive privacy in all digital activities.

Don’t take that the wrong way, it’s all well and good that we are getting solutions to a pressing problem, but the tunnel vision takes our attention away from the fact that we should be aiming higher, if we’d like to avoid Big Brother.

The lack of a more comprehensive solution in the larger context of privacy, i.e. privacy across the spectrum of digital activity, is what gives a project like Promether so much promise.

Promether’s mission, the team describes, is to “…provide everyone access to a free, open and secure decentralized privacy network, using advanced encryption protocols and innovative rewards-based blockchain solutions.”

Promether does not sacrifice privacy or flexibility in a bid to be practical, and it also simultaneously satisfies several stakeholders. It’s not yet another privacy coin that just masks transactions; the entire platform ensures privacy.

Any one developer that chooses to build applications on the platform inherits privacy, security and anonymity features, which are passed down to the end-user. The platform’s comprehensive protocol, detailed in their whitepaper, offers these features from top to bottom, going well beyond just transactions.

Furthermore, the project’s mission is to build an inclusive internet that offers not just privacy and security for users, but capabilities for governmental authorities and corporate players as well. There is no need to cause more division — rather, it would be better for cryptocurrency and each of the stakeholder’s interests to have a platform that champions our right to privacy while also accommodating the needs of larger entities.

Regardless, the privacy niche is a compelling but challenging investment decision for the cryptocurrency enthusiast. It is representative of the larger revolution that blockchain entails.

To what degree can we free ourselves of centralization? Can we own our very identities in a vulnerable digital age? Within the boundaries of the law, can we act as we please without fear of judgment or repercussion? These are important questions that will be answered in the coming years.

Related: Why We Need Secure and Protected Digital IDs