Privacy Coins—Sacrifice in the Mainstreaming Process of the Crypto Industry

Author: Golden Financial Reporter Jessy

At the beginning of 2024, the privacy track will usher in a heavy hammer from exchanges. First, OKX delisted tokens including XMR,  DASH, ZEC, ZEN, etc., and then Binance delisted XMR on February 20.

Among the reasons officially given by the exchange, Binance said that because "requiring Monero deposits to come from an open and transparent address", OKX It is "touching the offline rules and possible high-risk projects."

The real reason why these privacy tokens were offline was that the exchange was "avoiding supervision” needs.

This is not the first time that exchanges have delisted privacy tokens. Binance has delisted privacy tokens in some regions, and exchanges have collectively delisted privacy tokens in South Korea, etc.

The removal of privacy tokens from exchanges will undoubtedly reduce the liquidity and availability of privacy tokens. The delisting of privacy coins reflects more fundamentally that the encryption industry is offering privacy coins as a surrender to regulatory authorities.

What this phenomenon needs to cause ordinary users to reflect on is, is the need for privacy a real need? Apart from regulatory factors, have privacy coins been abandoned by the market? And how is the development of the privacy track behind privacy tokens?

Privacy needs are real needs

As the crypto industry accepts Bitcoin, the most secure cryptocurrency, is not completely anonymous. Bitcoin is a public, centralized ledger, and user addresses and balances are completely transparent on the chain. That is to say, when the Bitcoin address corresponding to a user is known, all transactions performed on the chain are traceable. In the industry, it is routine practice to profile users and monitor the flow of funds by tracking and monitoring transaction data on the Bitcoin chain.

The spirit advocated by Crypto during its creation was to make transfers private.

So, in response to this encryption spirit, privacy tokens were created. For example, Monero, which was born in 2014, is a very typical token that meets privacy needs. In the view of some geeks and anarchists: the privacy of assets is very important when facing political sanctions, and Monero achieves privacy protection through ring signature technology, hidden addresses, ring confidential transactions, etc., thereby achieving complete Privacy transactions.

Not only privacy coins, similar currency mixers Tornado Cash are favored by some whales, and some sophisticated whales will regularly use it to hide own asset status.

According to Rootdata data, there are currently more than 120 privacy technology-related projects, involving Layer1, layer2, privacy coins, mailboxes, Defi, currency mixers, and DID , VPN, social, private address wallet, etc.,

For example, the more well-known private address tools such as Umbra,  Secret, Aleo, Mina  Privacy public chains, Layer 2 like Manta, Starknet, etc.

And mainstream tokens like LTC also favor privacy technology. Privacy technology has been booming in recent years, and mainstream VCs are also good at privacy technology. Be optimistic. From the perspective of VCs, privacy is a field that has been accumulated for a long time. In recent years, it has been pursued by A16z, Binance Labs, Samsung Ventures, Sequoia Capital and other VCs with hot money, and the field's valuation is as high as billions of dollars.

The regulatory dilemma faced by the privacy track

Although It has real applications in the privacy field and has been developing steadily, with promising capital. But a big tree attracts wind, and supervision never leaves the scene.

Privacy coins bear the brunt. Because of the characteristics of privacy tokens, they are often seen in dark web crimes, money laundering, extortion and other criminal activities. It is precisely because of the application of these black and gray products that privacy tokens are often accused by governments of various countries of helping illegal and criminal money laundering. The delisting of privacy tokens by centralized exchanges is actually a sign that the exchanges are complying with regulations, or it is an act of surrendering to regulations

According to 2020 A report from Australia shows that Australian regulators and banks are encouraging cryptocurrency exchanges to delist Monero or risk being “disconnected from banking services.” Dubai has also banned the use of Monero under its digital asset regulatory framework. Monero has also been banned from exchanges in Japan and South Korea in an effort to curb money laundering and reduce organized crime.

Japan introduced a self-regulatory plan for the Cryptocurrency Exchange Association in June 2018 to prohibit the trading of anonymous currencies. Then in November 2018, the Japan Financial Services Agency introduced new standards for cryptocurrency exchanges, which explicitly prohibited cryptocurrencies that have high anonymity and can be easily used for money laundering. South Korea is slightly later than Japan, two years later. In November 2021, it released a legislative notice on the implementation regulations for the legislative amendments to the "Specified Financial Information Law". According to the implementation regulations, virtual asset service providers will be prohibited from trading anonymous coins and processing virtual assets with money laundering risks, which also means that all anonymous currency assets will be withdrawn from South Korea.

Due to the regulatory policies of various countries, as early as May 31, 2023, before this comprehensive delisting, Binance announced that it would stop selling to Users in the four EU member states of France, Italy, Poland and Spain are provided with 12 privacy coins such as Monero, Zcash, and Dash.

Not only privacy coins, but also other protocols and applications on the privacy track have not been able to escape. In 2022, the privacy application currency mixing protocol Tornado Cash was sanctioned by the United States. The main results of the sanctions are the following: Tornado Cash was supervised, and the founder's Github account, project code library, website domain name, USDC contract, and RPC services (originally provided by Alchemy and Infura) were completely banned.

It can be seen that the biggest problem facing the privacy track is supervision, and the most direct problem of supervision is to make these privacy products less accessible. . However, for users who are in urgent need of privacy products, they will still obtain the products through other channels. But the problem is that there don’t seem to be that many users of privacy coins.

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Privacy tokens are not the only option for privacy needs

Perhaps the biggest threat to privacy coins is not regulation, but other products on the track.

First of all, mainstream tokens have entered the privacy track, giving their tokens privacy functions. For example, in 2022, Litecoin MimbleWimble is implemented, and users can choose to send confidential Litecoin transactions, in which the amount sent is known only to the sender and receiver, and allows the MWEB address to hide the account balance. However, it was the upgrade of this function that also led to the delisting of Litecoin in South Korea because this function of Litecoin did not comply with South Korean anti-money laundering regulations.

In an article published by Vitalik at the end of 2022, Ethereum's privacy solution was also proposed. And proposed the EIP-5564 protocol on Ethereum, which is the so-called privacy address proposal. Stealth address is a one-time wallet address that can give users ownership of assets without exposing any wallet address or user identity. Stealth addresses also enable the recipient of a transaction to remain anonymous, preventing any public connection on the blockchain between the identity of the sender and recipient.

The Ethereum ecosystem has been using Zk technology to promote privacy protection. Vitalik once emphasized that ZK-SNARK  will be as important as the blockchain in the next ten years. The expected Layer 2 of Ethereum, which relies on ZK technology, has also been launched in the past two years.

Conceivably, with mainstream tokens embedding privacy features, they have a wider audience than privacy tokens.

Privacy-level technology has always been progressive. There are currently four mainstream privacy technologies in the industry, namely zero-knowledge proof (ZK) and trusted execution environment. (TEE), secure multi-party computation (MPC), and homomorphic encryption technology (HE). General privacy public chains are implemented based on the above four technologies. Among these four technologies, ZK, MPC and HE are cryptography-based privacy technologies, while TEE is based on hardware design.

Zero-knowledge proof, which provides a method to cryptographically prove a pair of information without revealing the specific details of a set of information or data. knowledge of this particular set of information or data. This technology is generally recognized in the industry through Ethereum’s ZK-rollup. There are currently many ways to implement zero-knowledge proofs, such as ZK-SNARKS, ZK-STARKS, PLONK and Bulletproofs. Each approach has its own advantages and disadvantages in terms of proof size, prover time, and verification time. For example, the privacy protocol Tornado Cash uses zero-knowledge proof.

The trusted execution environment can provide an environment isolated from the mobile operating system to protect users' sensitive information. This is also the most mature technology today and its main application. There are Secret Network and Oasis Network.

Secure multi-party computation means that multiple participants use private data to participate in confidential calculations and jointly complete a certain computing task without revealing their own private data. This technology can meet the needs of people to use private data for confidential calculations, and effectively solve the contradiction between the "confidentiality" and "sharing" of data. Currently, in the field of MPC, the main technologies used are key technologies such as secret sharing, inadvertent transmission, obfuscated circuits, homomorphic encryption, and zero-knowledge proof. Currently, in the industry, MPC technology is most widely used in wallets and asset custody. .

Homomorphic encryption technology focuses on data processing security and provides a function for processing encrypted data. That is, others can process the encrypted data, but the processing will not reveal any of the original content. This technology will be used on some public chains. Fhenix, a confidential blockchain powered by homomorphic encryption, received US$7 million in seed round financing last year. This is one of the public chain solutions that is more popular among institutions after the ZK craze.

It can be seen that privacy technology has actually been embedded in all aspects of the encryption ecosystem. For users, privacy tokens are not the only option to meet their privacy needs.

The era of privacy coins has passed, but the privacy track has not

The centralized development of privacy coins from 2014 to 2017, project and technology development have matured, there are basically no technical barriers, and competition among privacy coins is fierce.

But for ordinary users, the technical threshold for use is still high, and its popularity among encryption users is low. Moreover, the demand for privacy is not accepted by the market. Coupled with regulatory crackdowns, privacy tokens are indeed not that popular. They are slowly becoming the plaything of a small group of geeks.

Dr. Duncan S.Wong, the core technology developer of Monero, once said that absolute privacy tokens will no longer be welcomed and will be harmful to the public and individuals. Encrypted tokens that achieve complete privacy and accountable privacy to regulatory and auditing agencies will gradually become mainstream.

Even in the darknet market, the most mainstream transaction currency is Bitcoin. In real applications, people are actually more willing to use currency mixers like Tornado Cash to hide their transaction behavior and wallet addresses, because this allows users to use their commonly used mainstream currencies to trade, rather than being difficult to use and Illiquid privacy coins.

Moreover, most users who hold privacy coins do not use the coins to meet their privacy needs, but are optimistic that they will have high room for growth in the future. . The coin mixer is different. All users are users who want to meet privacy needs.

From this point of view, for users, privacy coins are not an economical and practical choice to meet privacy needs. After all, it is shared by all currency holders. The cost of privacy coins meeting privacy needs.

And privacy coins are becoming a victim of the industry's efforts to make cryptocurrency mainstream. In the face of the development of cryptocurrency, supervision cannot do nothing, and the encryption industry has launched privacy coins. This can be seen from the fact that centralized exchanges have removed privacy coins from their shelves.

Things that are geeky enough will not be widely accepted by the public, not only in the field of cryptocurrency, but also in other aspects of the real world.

Privacy coins may become a sacrifice in the process of the encryption industry moving towards the mainstream, but encryption technology will not stop developing, and it will definitely be used in encryption projects . The privacy track remains one of the important tracks in the industry.