Privacy coins have begun their ascent to the spotlight. With an increasing demand for privacy in day to day lives and the shortened supply of technologies that furnish it, the status quo has shifted in favour of corporations. Most corporate companies do not vouch for privacy as they greatly benefit from user data. Governments, through various privacy laws, have given the bare minimum to their subjects, when it involves the use of monetary funds. Know Your Customer (KYC) policies and Anti-Money Laundering (AML) laws take away whatever residual privacy is left to the user. There is a growing need for a financial system that focuses on privacy.
The crypto-economy always needed a privacy coin ever since the revelation that Bitcoin was pseudonymous and not anonymous. This resulted in the emergence of privacy coins such as Monero (XMR), Dash (DASH), Zcash (ZEC), Beldex (BDX), etc.
Litecoin’s announcement of implementing privacy after it’s scheduled halving this year has also resulted in a lot of attention to privacy coins. Litecoin, the fifth-largest coin in terms of market cap, is looking to apply the MimbleWimble protocol by way of a softfork. This is a strategic move to make the coin more scalable, fungible, and induce privacy.
What is MimbleWimble and why is Litecoin adopting it?
The protocol gets its name from a spell in Harry Potter that prevents someone from spilling a secret. As silly as it may sound, it works in an exemplary manner. A typical blockchain transaction doesn’t obfuscate the amount or mask the sender or receiver’s address. MimbleWimble, originally proposed by an anonymous user, is a development on Confidential Transactions built by Dr Adam Black. Confidential transactions conceal the amount of transaction. MimbleWimble uses cryptographic techniques and elliptic curve mathematics to obscure both the amount and the sender/receiver addresses. When initiating a transaction, the sender’s public address and the amount is multiplied by a very large value. Miners validate the transaction using the resulting address and amount without needing to know the actual information.
However, MimbleWimble is just one solution to the problem of governments’ and corporations’ invasion of user privacy. Another viable option to fortify privacy is the Ring Confidential Transactions of the CryptoNight protocol.
Ring Confidential Transactions vs MimbleWimble
Currently, MimbleWimble is the blockchain privacy architecture behind the cryptocurrencies, Grin and Beam. Litecoin will be the latest to add the protocol to its network.
Beldex and Monero blockchains are the implementations of CryptoNote’s Ring Confidential Transactions. Though both the protocols were developed for the same purpose, at first glance, their functionalities may seem similar, but they do have minor variations.
Privacy is default on both the protocols, but while RingCT doesn’t require any interaction between the sender and the receiver, MimbleWimble does.
RingCT uses stealth addresses that are derived from the user’s public and private keys. These stealth addresses can be posted anywhere without the risk of being exposed, as it cannot be linked to the user. That is not the case with MimbleWimble since the public address needs to be privately shared with the receiver.
MimbleWimble is more scalable but this is not a constraint on RingCT. The problem of scalability in RingCT is eliminated by the use of bulletproofs.
How does privacy add fungibility?
Fungibility is the property of any fiat currency that maintains equal values between all the notes of its distinct denominations. In cryptocurrency, fungibility is termed as the ability of a coin to maintain equal values between all of its fractions, that is, the value of one coin will equal the value of another coin within the network. No one coin will value lesser than the other. Bitcoin and other digital currencies run the risk of an individual fraction losing its value over being ‘tainted’ — coins that are stolen or used in illegal activities such as funding of terrorism. But privacy coins are inherently fungible, meaning, no single coin of a particular cryptocurrency will lose its value against the other. This is because there is no history of that coin that can be traced.
Major threats to privacy
One of the most daunting threats to privacy is hacking. In the span of a few months, several crypto-exchanges have seen large scale hacks of user data and funds.
Many crypto-exchanges such as Bitpoint, Binance, Coincheck, Bancor have experienced an attack on privacy this year.
In August, the cryptocurrency exchange Binance revealed that almost 300,000 Litecoin wallets were subject to a dusting attack. Small or insignificant amounts of Litecoin referred to as ‘dust’, unnoticeable by the user, is sent to their wallets. When the user spends the ‘dust’, it’s movement is then tracked and analyzed in relation to the movement of dust from other users. This kind of analysis can reveal the origin of the dust, connecting it to a wallet address. Other techniques such as blockchain analysis will further lead to the deanonymization of the user as wallet addresses are linked to their personal identities.
Coinbase reported that it foiled a recent hacking attempt in which the hackers tried to extricate users’ data from its servers.
All these flaws in security have magnified the need for privacy and steered the world towards embracing a privacy-centred ecosystem. Beldex servers this purpose by developing a secure cryptocurrency exchange that uses a privacy coin as an ecosystem token.
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