This is the first full week of Blocksplain, so thank you to everyone who has subscribed already or is following on Twitter or Facebook. As I begin this journey in 2018 to make sense of blockchain and cryptocurrency, I want to firstly get to grips with the current batch of leading cryptocurrencies. In this post I’ll look at privacy coins, one of the most popular categories.
To quickly set the scene, different features get emphasized in different coins. Bitcoin is commonly referred to as a “store of value” coin nowadays, since its price is so high relative to all the others. The second-ranked Ether coin was designed to have utility for the hundreds of apps that are currently being built using Ethereum as a platform. For example, in my Augur post I explained how you’ll be able to bet on prediction markets using Ether.
Then you have the coins battling to become the dominant currency for transactions – such as Litecoin and Bitcoin Cash, both of which are fast and have low transaction fees. Good attributes to have if, for example, you want to buy a cup of coffee.
So let’s get to the privacy coins, which as the name suggests are designed to emphasize user privacy. The leading candidates are Monero (XMR), Dash (DASH), Verge (VXG) and Zcash (ZEC). There are a bunch of others listed on this Reddit thread.
Why is privacy a big deal? Because on a blockchain like Bitcoin’s or Ethereum’s, every transaction is visible – literally stored on the blockchain, for everyone to see. Okay only the addresses are stored, so no private or identifying information. But there are ways you can discover a person’s identity, using network analysis and other methods.
Monero, using the most prominent example of a privacy coin, gets around this by using “ring signatures, ring confidential transactions, and stealth addresses to obfuscate the origins, amounts, and destinations of all transactions.”
Basically, Monero’s blockchain hides all the data – if you want it to. So it’s an opaque, untraceable blockchain. The other oft-mentioned benefit of Monero is that it’s fungible, which means that one Monero will always be equal to another. A Reddit user came up with this memorable example of why fungibility is important:
Congratulations! You just bought 1 bitcoin that used to belong to Satoshi Nakamoto. You know this because you can see that bitcoin’s entire history. Maybe you can sell it for more than one bitcoin, because it belonged to Satoshi.
Now you find out that another of your bitcoins was used by Pablo Escobar. Some merchants might not accept that bitcoin, because it is tainted by its history. This means it’s less valuable than your average bitcoin.
When privacy is baked in to your protocol, and all transactions are private, it’s impossible to see the history of any unit of your currency – and therefore, they are all equal.
Privacy coins have obvious benefits for the Dark Net – and that’s where Monero is predominantly being used – but I want to focus more on what these coins potentially mean for legit people and businesses.
The official Monero website has a good list of merchants who accept its currency. Many of them are exchanges and other crypto-related services. One that isn’t is Project Coral Reef, an online store created by Naveen Jain (an entrepreneur and investor) and Riccardo “fluffypony” Spagni (a core developer of Monero). Launched in December, it’s a collection of merchandise stores for forty-five musicians, including Dolly Parton, Weezer, G-Eazy, Lana Del Rey, Marilyn Manson and other popular artists. Jain and Spagni launched the project “to elevate the awareness and viability of using Monero in everyday consumer transactions.”
So Monero is being positioned as a transactional coin, as Bitcoin itself started out as (but now it’s too highly priced, too slow and too volatile). But why should merchants – and eventually consumers – choose Monero over the likes of Litecoin and Bitcoin Cash? If you’re buying a Lana Del Rey tee-shirt, does that transaction really need to be hidden from prying eyes? Also, both Litecoin and Bitcoin Cash are currently more liquid than Monero, since they’re available on more exchanges and so people are more easily able to trade for them.
The main reason why user privacy would be useful on an online store is to prevent theft of your financial data. Indeed, the creators of Project Coral Reef claimed that “people wanted to have more private transactions in the wake of breaches at stores like Target, Home Depot, and with credit bureau Equifax.”
Preventing your private data from being stolen is a great reason to use Monero, but it seems like overkill when you’re just buying merch at an online store. Right now the leading transaction coins, like Litecoin and Bitcoin Cash, have a bigger advantage in terms of their liquidity and ease of access. The old adage that ease of use is what drives adoption in Internet markets is apt here.
Let me know your thoughts on Monero, and whether you think it will be adopted for online shopping and maybe even your local coffee cart.
IMO, money wants to be free and anonymous; just like cash. Over the last two decades, with banks and plastics on the rise, these two attributes were forgotten, we trusted too much on the banking system, and it ended up where it is today, with zero interest rates, higher maintenance fees, yet we still use for them for their convenience.
Cryptocurrency (and especially anonymous ones like Monero) bring cash-like features to the electronic world. I’m not sure if Monero itself can be that cryptocurrency we’ll all use no matter if the reasons are legit or not, but most certainly its innovative traits will be adopted by others and as they mature and prove for scale.
I wonder if we’ll see a mix n match model emerge, where you use e.g. Monero for a transaction you want to be private and you use e.g. Litecoin to buy your morning coffee. Horses for courses. The leads on Monero and Litecoin actually half-joked about partnering today: https://twitter.com/SatoshiLite/status/957139266752020480. Makes a lot of sense though.
Perhaps… Liquidity is king. LTC-Monero may be more than a joke, because LTC needs a differentiation with BTC now adopting SegWit, larger block sizes, and in the near future Lightning Networks. In this article [https://segwit.org/my-vision-for-segwit-and-lightning-networks-on-litecoin-and-bitcoin-cf95a7ab656b] Charlie Lee explains his vision for LTC, and half-admits its irrelevancy if/when BTC adopts all these innovations. On this note, Ethereum had plans to add ZCAsh anonymity in much the same way; https://www.ccn.com/ethereum-add-zcash-privacy-says-vitalik-buterin/
Thanks Emre, great points as usual.
Great article Richard. It’s so good it really got me thinking and has prompted what has become a small essay – so apologies. I hope you bear with me.
I struggle to see a TRULY legit reason to want to use Monero – other than I wanting to purchase certain items that really are probably not going to add to healthy civic society and not have anyone know I’ve done this. Just like cash is used for today.
Now, before you scream “Get thee behind me Satanic banker-type!!!” I hasten to add that I am all in favour of a decentralised internet and embrace blockchain as the logical extension of the internet. And I like my privacy.
But in the hierarchy of financial data, the stuff I’m most worried about losing is my private keys, internet banking password, credit card details – stuff that can allow criminals to steal my money. Definitely more than my transactional information, which I know is able to be looked into by a number of agents on whose payment rails I travel.
And when something bad does happen such as a fraudulent payment or theft, I want someone to ride to my rescue and make things better. And that generally happens.
The trade off for this protection and safety net – up until now – has been handing all of this to a trusted intermediary like a bank. And to be honest banks haven’t shown themselves to be the most adept industry at understanding and innovating on the internet in the last 20 years. In many cases regulators haven’t made it easy for them – but that’s another story and is why fintech is an actual thing.
Thanks to digital disrupting banking and making money digital, in the very near future it’s clear we probably won’t see banks playing this all-ecnompassing role in transactions, payments and everyday banking. A bunch of AI bots will be using my financial data to automate what we now call personal finances, or everyday banking. All the mundane keeping track, moving funds, paying bills etc that I have to do myself now. Stuff that is impossible to do with cash as that is truly anonymous and, well, dumb.
And I, like most people I believe, will absolutely share my data to have the equivalent of a personal banker running my life for me. That’s a fair trade off to me.
And maybe banks will be doing something useful like storing my identity, passwords etc so I don’t have to worry about any of that going missing. They are generally pretty good at storing and protecting stuff.
Sorry for this being longwinded, but my point is that I, and I think most consumers, will accept a fair trade off of sharing their financial data to ease the burden of financial management and also absolutely for protection. There will always be caveats on how the data is used and who can see it, but sharing it can add value.
All of which leads me to wonder then why would I use a coin that is like truly anonymous and, well, dumb? Unless I wanted to hide stuff myself?
Hey Richard,
Great blog, thanks for all the work you’ve put in here.
One concern (possibly unfounded) is that privacy coins like Monero could be used by foreign governments that are sanctioned, or have account/asset freezes like Russia and N Korea. Also that’d be great tools for getting around AML, so international cartels could and would prefer privacy coins.
It seems as if Silk Road type transactions weren’t a huge concern to the U.S law makers as they didn’t seek to outright ban exchanges and bitcoin when they arrested its founder, but these cases are significantly wider and deeper. How can more privacy focused coins avoid being regulated due to the above issues? Couldn’t we see the Russians move more money into say European elections using Monero to block its origin?
Thanks Alex, you raise some excellent points. I can imagine if there were a scandal with Monero similar to the Russian-Facebook case after the election, then yes regulators would swoop in.