Blockchain Technology 4 min, 6 sec READ

by Mike Dalton

Bitcoin and Ethereum don't offer privacy to the extent that Monero or Zcash do. However, they do have some privacy features―how does this work?

Privacy coins like Monero and Zcash offer a high level of privacy. Both coins prevent your transactions from being traced or viewed―or, at least, they give you that as an option. However, privacy coins aren't your only choice: many major cryptocurrencies, such as Bitcoin, Bitcoin Cash, and Ethereum, have introduced their own privacy features as well.

Major cryptocurrencies don't offer the same features that you'll find in true privacy coins. Among the top thirty coins, Monero and Zcash have a monopoly on "stealth" addresses and "shielded" addresses, which truly hide your transaction data. (Dash is considered a privacy coin, but it doesn't work in the same way.)

In any case, there are a lot of privacy features among other coins to choose from―let's take a look.

Coin Mixing and Transaction Mixing

Coin mixing provides lightweight privacy of sorts. It obscures connections between transactions by combining several different transactions, thereby preventing most attempts at tracking and analysis. Bitcoin's CoinJoin feature provides transaction mixing, and so do several related protocols, including TumbleBit, CoinShuffle, and Bitcoin Cash's CashShuffle. Additionally, Dash's PrivateSend feature serves a similar purpose.

There are a few downsides to coin mixing: for one thing, some mixed transactions remain traceable. Additionally, not every wallet supports CoinJoin―however, if you use a coin mixing service rather than Bitcoin's built-in features, any wallet should work. In the end, coin mixing is a useful tool if you're using Bitcoin or similar cryptocurrencies, but it isn't nearly as effective as the truly private addresses offered by Monero and Zcash.

Zero-Knowledge Proofs

Zero-knowledge proofs provide privacy in a straightforward way: they allow data to be verified without ever revealing that data. One type of zero-knowledge proofs are zk-SNARKs, which are perhaps best known as the basis of Zcash's shielded address system. However, zk-SNARKs can be used just about anywhere―in fact, Zcash itself has previously made an effort to introduce zk-SNARKs to Ethereum.

Tornado Cash, meanwhile, is a separate privacy project for Ethereum. It implements zk-SNARKs in a different way: it uses a smart contract to accept ETH deposits, then allows that ETH to be withdrawn to another address. In between those steps, Tornado Cash's smart contract uses zk-SNARKs to ensure that deposits and withdrawals are unlinkable. In other words, Tornado Cash acts as an enhanced mixing service.

Wallet-Based Privacy

Bitcoin clients and wallets communicate with various entities, and under some circumstances, this can reveal potentially identifying information, such as your wallet balance or transaction patterns. Since this sort of information isn't written to Bitcoin's public ledger, this isn't a serious issue. However, it is worth considering, as Bitcoin expert Jimmy Song explains in this article.

One way to stay private is to run your own full node with a full copy of the Bitcoin blockchain. However, Neutrino wallets offer a more convenient alternative―Lightning Labs and Bchd are developing Neutrino wallets for Bitcoin and Bitcoin Cash respectively. To be clear, Neutrino wallets don't offer untraceable transactions or private addresses―they just prevent some possible data leaks.

Privacy for Smart Contracts and Scripts

Smart contracts are scripted programs that are common on Ethereum and many other blockchains. They are rarely private by default, but there are a few ways of introducing privacy. Enigma, for example, is working to develop secret smart contracts for Ethereum. This project uses zero-knowledge proofs in order to create contracts that can verify information without knowing or exposing user data.

Bitcoin, meanwhile, allows programming through the use of scripts. Scripted transactions behave differently from standard transactions, and they are easy to identify. Taproot provides a solution―it makes scripted transactions look just like regular transactions. Taproot doesn't provide the same level of "secrecy" that Enigma does, but it does improve Bitcoin's overall untraceability.

The Overall State of Crypto Privacy

Monero and Zcash still provide the de facto standard for crypto privacy. Analysis firms like Chainalysis are the number one threat to crypto privacy, and Monero's stealth addresses more or less eliminate any possibility of your transaction being traced. Zcash's shielded addresses are optional, and therefore more complicated, but they are also very effective anti-tracking measures.

Bitcoin and Ethereum, meanwhile, dominate in terms of convenience and acceptance. Although they do not provide perfect privacy, they do provide privacy features that are often under-recognized. At the same time, Bitcoin and Ethereum's privacy features serve very specific purposes―they shouldn't be seen as a catch-all solution to crypto privacy.

One more thing: most of the features discussed in this article only apply to standard transactions. If you decide to use a centralized exchange, you'll most likely need to identify yourself, use the exchange's own wallet, and allow the exchange to hold your crypto on your behalf. If exchange privacy is your concern, consider decentralized exchanges if you need a more private alternative.