Editor's Note: This article comes fromCrypto Valley Live (ID: cryptovalley)Editor's Note: This article comes from
Crypto Valley Live (ID: cryptovalley)
Crypto Valley Live (ID: cryptovalley)
We just launched support for two cryptocurrencies, Dash and Zcash, in Chainalysis Reactor and KYT. As two of the most popular "privacy coins" (cryptocurrency with privacy-enhancing features encoded in their protocols), they account for more than $1.5 billion in daily reported trading volume.
You might be wondering why Chainalysis products support privacy coins. Isn't the whole purpose of privacy coins to make transactions untraceable?
This statement is too simplistic because it misunderstands the privacy features offered by the likes of Dash and Zcash, and how users take advantage of them in actual day-to-day transactions. Below we examine how Dash and Zcash allow investigators and regulatory experts to investigate violations while balancing users’ privacy needs with the industry’s compliance needs.
secondary title
What exactly makes a privacy coin a privacy coin?
Many people think that BTC transactions are private, but this is also a misconception. Because transaction information, addresses and balances are recorded in a public and permanent ledger. Chainalysis can tag addresses with real-world entities for compliance purposes by analyzing transactions and using open source intelligence (note: we only identify services, not individual user wallets).
In general, privacy coins have features designed to make the above process more difficult. This can be achieved by adding privacy features to existing blockchains, including BTC. However, privacy coins run entirely on brand new blockchains with privacy features built into the protocol. Below, let's look at specific privacy features that Dash and Zcash have implemented.
Dash's Privacy Features
Dash was launched as a code fork of BTC in 2014, and its most notable privacy-related change is the PrivateSend function. PrivateSend is implemented by wrapping the mixing protocol, just like the Wasabi wallet of BTC or other mixing machines, to hide the source of funds. But keep in mind that PrivateSend is optional, and Dash does not use coin mixing by default.
The usual rationale behind these anonymous transaction techniques is that multiple people send funds in one large transaction, and then a new address controlled by each person receives the same amount of funds. This makes it difficult to link each sending to the receiving address.
image description
For Dash’s PrivateSend transactions, users’ funds are split into one of the following standard denominations: 10, 1, 0.1, 0.01, or 0.001 DASH. These funds will then be sent in a mixed transaction that only includes a certain denomination (e.g. like the screenshot above, all inputs and outputs are 0.1 DASH). The amount of Dash the user ends up getting back remains the same, but the funds have been mixed with funds from other PrivateSend users. These mixed transactions can later be sent to another user via PrivateSend.
Hybrid transactions with the same functionality as PrivateSend can also be performed on other technologically similar cryptocurrencies. This means that from a technical point of view, Dash’s privacy features are no stronger than those of BTC, so the label “privacy coin” is a misnomer for Dash. In fact, some stand-alone wallet software offers more advanced forms of coin mixing that work with major cryptocurrencies that are not known as privacy coins, such as BTC, BTC Cash, and Litecoin, among others.
Unlike most BTC mixers, PrivateSend does not charge any fees for mixing transactions. So while mixing transactions with Dash PrivateSend may not be more efficient, it does make it cheaper and simpler for users to execute transactions.
Zcash's Privacy Features
© 2016 Electric Coin Co.
Launched in 2016, Zcash is a privacy coin with an explicit encryption algorithm at its core. Instead of changing transaction patterns to hide user information, it provides users with the possibility to encrypt blockchain activity through a process called shielding.
Zcash provides protection through shielded pools, a set of encrypted addresses where balances and transactions are always encrypted. Transactions in and out of the shielded pool, or transactions within the shielded pool are transparent and visible, but the addresses of both parties in the pool are always encrypted. However, like Dash’s PrivateSend, users must first opt-in to Zcash’s shielded pool to gain cryptographic capabilities. Transactions do not take place in shielded pools by default, but are public and unencrypted, similar to BTC.
So how does Zcash have a public ledger if all this information about addresses and transactions is encrypted and only the owners of those addresses can view their information? How do people know if the encrypted address in the transaction block is valid and has received the funds sent?
Zcash uses zk-SNARKs, a zero-knowledge proof system that can provide a yes-no answer to a question of authenticity without sharing any details. This allows users to prove to the network that they have funds in their account without revealing the account balance.
zk-SNARKs allow transactions to be protected in the open, with details only known to the parties involved (the receiver may not even know the sender's address!). Transactions involving shielded pools are almost always charged a flat fee of 0.0001 ZEC to prevent the chance of observing patterns for speculation.
secondary title
Practical Uses of Dash and Zcash Privacy Features
As mentioned above, the privacy features of Dash and Zcash are optional and can be chosen based on individual judgment for each transaction. Therefore, the level of privacy protection features of each currency will vary greatly based on real-world usage.
The Reality of Dash Privacy
Mixing transactions related to PrivateSend account for about 9% of all transactions on Dash. This is larger than the share of BTC transactions that use coin-mixing or mixing techniques, but is still relatively small and a declining percentage of Dash transactions.
Users do not have to use the outputs of these mixed currency transactions to execute PrivateSend transactions. Instead, they can choose to use it with non-mixed funds. This makes less than 0.7% of Dash transactions using PrivateSend to actually transfer funds.
Mixing transactions, including PrivateSend, are easy to spot and identify on the Dash blockchain. Because they are still transparent, the same methods used to analyze and identify mixed currency transactions using BTC can also be used on Dash.
Because some people need to go through a large number of input transactions to break down funds into various denominations, it is also possible to link inputs and outputs in some PrivateSend transactions. For example, a user sent 73.4 DASH and got 14 inputs, which can be interpreted as he received: 7 10 Dash, 3 1 Dash and 4 0.1 Dash. The Princeton researchers showed that, in specific cases, combining symbols can also be used to identify individual addresses from which PrivateSend output comes.
This means that while PrivateSend does increase privacy for its users, its censorship is still successful.
The Reality of Zcash Privacy
Therefore, even though Zcash uses zk-SNARK encryption to provide a stronger hiding effect, Chainalysis can still derive the transaction amount and at least one transaction address from more than 99% of ZEC (Zcash) activities.
In terms of balance, although a relatively high number of ZEC passes through the shielded pool every day, only 5% of the ZEC is currently stored in the shielded pool. This is partly due to a protocol requirement that all proceeds from mining must first pass through a shielded pool before being transferred to a public address. This means that if you trace the origin of ZEC all the way back, it will always come from one of the shielded pools. This is intentional so that all public ZEC transaction activity can eventually be traced back to a blocked activity.
Zcash's shielded pool can provide greater privacy than mixing transactions, but it is not indestructible. UCL research shows that using some simple heuristics based on the usage patterns of shielded pools can reduce their anonymity. Most Zcash users don't even use Zcash's privacy features at all, they said. The researchers also found that most of those who use shielded pools for transactions also operate in a simple, direct and easily identifiable way, such as withdrawing the same amount of funds as they just deposited in a short period of time. ZEC.
secondary title
