For many years it has been wrongly believed that using cryptocurrency payments would be completely anonymous and users activity could not be traced.
Bitcoin was indeed the payment solution chosen by Darknet users for illicit activities such as selling and buying drugs and weapons. That was the case until Ross Ulbricht, the creator of the first modern darknet market Silk Road, was arrested and persecuted also on the basis of the 13.4M $ worth of Bitcoin that were traced back and associated to him (wired.com, 2015).
Understood that Bitcoin does not offer any privacy or anonymity feature, a new breed of cryptocurrency solutions were born to address this vulnerability, the so called Privacy Based coins.
As of today, we have about 30 privacy-based solutions on the market, however there are only a handful which seems to be solid projects, delivering innovative approaches to protect users privacy.
Please find below more details about some of the best privacy coins available.
Monero (XMR)
Monero has been a popular alternative cryptocurrency among enthusiasts who favor anonymity over privacy. Improved anonymity was added to the protocol last year, as Confidential Transactions (CT) were introduced in January of 2017.
Monero has become an established solution within the crypto community and also used for darknet transactions given high level of anonymity provided. It uses Stealth Addresses & Ring CT to hide both sender and receivers and obfuscating addresses
Nevertheless a research in 2017 highlighted 3 major threats (Ability to reveal the output amount, Leverage Output Merging, Temporal analysis) and the Monero project is still working on resolving them.
ZCASH
Zero Cash was launched in 2016, sponsored by US and Israeli Military, Zcash provides enhanced privacy to its users by implementing a zero knowledge form of cryptography, called Zs-Snarks.
Zs-Snarks enables to fully encrypt transactions on the blockchain, still allowing the network verification process to take place, therefore called zero-knowledge proof. It allows the network to confirm the correctness of the transactions without having to know what was its content, and therefore exposing the users to being traced or identified.
Zcash addresses will be either in the transparent pool or in the shielded pool. Implementing the privacy options is not set by default due to its high CPU demand. It is estimated that only 5% of the addresses are shielded, hence exposing the small amount of users implementing such feature to the risk of being identified.
Dash
Digital Cash (DASH) is based on the use of Masternodes, where transactions input and output are mixed in order to avoid user’s traceability. However there are concerns around the fact that such nodes cannot be audited and there is no certainty that they could still be logging each and every transaction. Also what will happen if a masternode is attacked or compromised? is Dash really decentralized?
Trust issues regarding the impossibility to audit masternodes and questions around how much this solution is really decentralized
Verge
Verge (XVG) was founded in 2014 as a decentralized open-source cryptocurrency integrating Tor and I2P network to achieve their privacy goals.
It operates under a transparent blockchain, however users are protected as it obfuscate traffic and hide the users IP. I2P stands for Invisible Internet Protect, which implements obfuscated tunnelling services using IPV6. It anonymizes all the data that is sent over the network.
As a proof of its anonymity feature, in April 2018 Pornhub implemented Verge as a payment option for its premium users, in order to offer them extra privacy levels.
Future developments
Personally, I do not think that today is possible to perform 100% anonymous transactions, as several flaws and weaknesses has been already reported and too many stones are left unturned.
However the development of Privacy Based solutions is moving in the right direction, in particular when recent news state that Japanese exchanges will not support privacy based coins, exactly for the reason that regulators might not be able to fully trace back transactions and users identities and Europol reported concerns managing Dash, Monero and Zcash.