Privacy tokens are used for anonymous transactions. The basis of an anonymous transaction is ensuring that a) wallets cannot be linked to personal information, and b) the transaction details are scrambled and untraceable. How is this done? The network obscures token transfers from end-to-end. Orders are then fulfilled and validated by anonymous miners. By leveraging modern cryptic privacy techniques across a network, the data and privacy of all transactions are able to proceed like a normal blockchain but without user traceability, and blockchain transaction amounts deliberately in shambles.
How they remain anonymous
No public records are kept. So are transactions safe and trustable? Yes. There are several ways in which activity remains anonymous but simultaneously is accurate and reliable information. Let’s look at two privacy token networks for different examples of this:
Monero – Implements a one-time-use stealth address for each transaction. The stealth address is a unique 95-digit code that contains the recipient’s address. The Monero blockchain algorithm scrambles the code so that no address is recognizable or traceable publicly, but the participants in the transaction are able to verify the execution and success of said transaction. The wallet key scans the transactions on the blockchain until it finds and then matches the transaction containing the scrambled one-time wallet address.
Monero also groups genuine transactions with ‘decoy’ transactions that are outdated or already used, making it impossible to determine the amount sent, recipient addresses, or even what the transaction contained. The blockchain scans previous blocks to ensure all transactions are valid, then proceeds to approve the transaction.
ZCash – This privacy network uses Zero-Knowledge Proof technology to signify the transaction is valid. Zero-Knowledge protocols use indirect sources to determine whether all information involved in a transaction is true.
Each privacy token network uses different means to maintain its private nature, such as the requirement of using private tokens in a transaction which shields any other assets contained.
The benefits of using privacy tokens
When using a decentralized exchange or wallet, it’s already established that the wallet user owns 100% of the cryptocurrencies held. Privacy tokens take this a step further by shielding the amount you own and avoiding any personal ties to the wallet funds. Therefore they are unseizable assets and are capable of protecting your wealth from unfavorable authorities.
The funds are also nontaxable while they are anonymous, and while it is easier to send to a regular decentralized wallet or exchange to convert back to fiat currency if necessary, this process can also be done anonymously. This brings us to the next question…
Are they legal?
In some regions – specifically Australia and South Korea – privacy tokens are banned on exchanges. This still does not halt users from accessing them through decentralized and anonymous wallets. Country to country differ in legality, but more often than not, they are legal.
Despite privacy tokens being legal in the US, they have come under much scrutiny from big corporations and governments for their ‘black market’ reminiscent attributes, suggesting they may enforce harsher restrictions should these privacy token networks gain further popularity. In late 2020, the IRS went as far as offering $625,000 to anyone that could crack the Monero network. All attempts were unsuccessful.