Privacy in Crypto

The controversy around these tokens

Not everyone loves the idea of totally private transactions. Private crypto networks can be tools for criminals, money launderers, or darknet users to transfer funds anonymously. This Slate article from November about Monero is titled “The Bitcoin Competitor Beloved by the Alt-Right and Criminals”. Using networks like Monero is giving these types of groups complete anonymity.

Naturally, governments are going to be mad at people making large anonymous transactions, it allows them to avoid taxes and commit crimes. In September of 2020, the IRS offered up to $625k for anyone who was able to crack the Monero network. The issue is, even if they find the solution to crack the Monero network, the chances are it won’t be 100% effective. There are many other privacy coins out there with the same level of security and anonymity, so the IRS has their work cut out for them.

Privacy coins

When you use a bank account, you are trusting that bank to keep your financial data secure. This can include your social security number, address, and more. On top of all that, you’re allowing the bank to monitor all your transactions, and keep a record of them. A lot of people have a problem with that. For some it is the issue of privacy, they believe that only they as an individual should have access to any payments or transactions they take part in. Others don’t trust a bank with their information, data breaches are prevalent within banks, and even governments. These breaches can lead to identity theft and credit fraud.

Privacy coins fix these issues by making your transactions untraceable. Coins like Zcash (ZEC), Dusk Network, and Monero (XMR), are some of the most popular type of privacy crypto. There is no way to trace a transaction through amounts, or any other data given on the tokens respective blockchain.

How are these different from Bitcoin?

Bitcoin and a privacy coin like Monero are both decentralized and run on a blockchain. However, with Bitcoin the ledger is transparent. This means that it is possible to track the transactions sent to and from anyone’s wallet.

Monero has the highest market cap out of all the privacy coins. Monero uses ring signatures, a type of technology that allows users to keep their transactions anonymous. A ring signature uses keys from multiple different places in the blockchain, including keys from past transactions, in order to ensure the anonymity of signers. The network also has “stealth addresses” which create a one time address every time a user on the network is receiving XMR. This creates even more privacy. Other privacy tokens like Zcash operate in a similar manner, with a couple notable differences.

Monero community is unsettled

A mining pool is a group of crypto miners that combine their mining power over a network in order to have a higher chance of finding a block. Whenever they find a block, they receive tokenized compensation, in Monero’s case, with XMR.

Hash rate is the computing power of a network. So if a mining pool has 25% of the hash rate of a network, that means they essentially control 25% of it. The cool thing about blockchains blockchains like Bitcoin or Monero is that in order to control the network, you need to control 51% of the hashing power, which is really hard to do. With Bitcoin it’s practically impossible, a large country like the United States or Russia would have to spend unreasonable amounts of money on mining to even get close, which wouldn’t be worth it. The larger the blockchain and the more miners it has, the harder it will be to obtain 51% of the hash rate.

This is why on Tuesday, the Monero community became very uneasy. MineXMR, a Monero mining pool, went well over 40% hash rate earlier this week. Monero.observer reported on Tuesday that at one point the hash rate actually reached 50%, only one away from controlling the whole network. It also reports that it then dropped all the way to 38% because of outcry from the community, specifically on Reddit.

This is scary for a community, especially one that is so focused on decentralization and privacy. No one who uses Monero for transactions wants anyone to have control over the network, it ruins the entire point. It’s not entirely clear how the hash rate for MineXMR went down. People in the pool either stopped mining, or moved their mining to another pool with lower hash rate. This is due largely to PSAs and the pleading of the community on Reddit to individual miners, which doesn’t seem like a very viable long-term solution.

Even if MineXMR reaches a 51% hash rate, it doesn’t mean that they would try to compromise the network. They have their own website, with addresses for headquarters in the UK, so it wouldn’t be in their best interest to anger a global community worth billions. Also because of the technology I mentioned previously, like the ring signatures and stealth addresses, it makes it harder to compromise a network even with 51% hash rate.