Privacy coins, Bitcoin tumblers & PriFi: Private crypto transactions

Before the PriFi boom, Bitcoin tumblers and privacy coins were the only way to transact privately on-chain. Are they still valid options?

Privacy coins, Bitcoin tumblers & PriFi: Private crypto transactions
You'll feel like you're seeing the Matrix.

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Before the PriFi (private finance) scene emerged, people looked into Bitcoin tumblers and privacy coins as the only means to exert their on-chain privacy.

Privacy is not only a fundamental right but a foundation upon which many other human rights are built. When we speak of privacy, we speak about privacy of body, correspondence, data, finance, identity, location, and territory.

However, when it comes to financial privacy, there isn’t much we can do to exert our rights, considering the limitations of our traditional financial institutions. When Bitcoin emerged as an alternative to the current global monetary system, there was hope — a hope to uphold our right to financial privacy with a completely new system that doesn’t rely on third-party or trust-based models.

With the rapid rise of blockchain forensics, analysis tools, and the inherent open nature of public blockchain networks, all transactions are open for everyone to see. This makes it impossible to transact privately on an open ledger.

Because of this, many users constantly wonder how to send crypto privately and if this is doable at all. In this article, we’ll explore the popular methods through which one can send crypto privately. These methods can be broadly categorized into three distinct categories, as mentioned before:

  • Crypto mixers (or Bitcoin tumblers)
  • Privacy coins
  • Privacy solutions

We will also address common questions on how to use the blockchain privately and how privacy coins and cryptocurrency mixers work.

Let’s get started.

How do Bitcoin tumblers work?

Crypto mixers, also known as Bitcoin tumblers (even though they can support a wide variety of crypto assets, including ERC-20 tokens), allow users to transact with their cryptocurrencies privately. This type of service is referred to by a variety of names, including crypto mixer, Bitcoin tumbler, crypto tumbler, cryptocurrency tumbler, and so on.  They work by pooling together funds from different sources and then allowing users to withdraw from the pool to a destination address of their choice. Since the funds are lumped together and then distributed at random times, examining the trails behind exact coins and their new destinations becomes particularly hard, helping users gain privacy.

The dynamics of crypto mixers can be explained through an analogy: If you take ten $100 notes from ten people and put them all together in a bag, it is unlikely that each person will have the same note they put in if you ask them to retrieve their notes. If you then play around with factors such as the order of retrieval, where notes are delivered, in what order and at what times, it becomes even more difficult to track the transaction trail of an exact note.

Bitcoin tumblers follow a similar model. If more people contribute, it gets progressively harder to trace which note originally belonged to whom. Crypto or Bitcoin mixers create private pools and muddle them before sending coins out to pre-set recipient wallets.

Diagram showcasing how crypto mixers work (Source).

There are two main types of crypto tumblers. They are sufficiently different, although they stay true to the founding idea of how Bitcoin mixers work.

  1. Centralized crypto tumblers (mixers) will receive your Bitcoin or tokens and send it to a designated address for a fee.
  2. Decentralized crypto tumblers are built on the blockchain and use a protocol to receive and send identical amounts of Bitcoins or tokens. They usually use a peer-to-peer or coordinated approach and involve many people, usually in the hundreds.

Benefits of crypto mixers (Bitcoin tumblers)

Regular cryptocurrency transactions are traceable and can be sufficiently proven by exchanges. If the coins you bought were involved in illegal activities (such as black market transactions), a crypto exchange could freeze your funds even if you weren’t complicit in that behavior. The traceability of blockchain transactions and KYC verification exercise make the persons involved in a certain blockchain transaction potentially identifiable by crypto exchanges.

With crypto tumblers, the idea of untraceable cryptocurrency transactions is possible.

Crypto tumblers help you stay private as you transact on the blockchain, keeping your dealings away from the public eye, preserving your identity, and obscuring sensitive information on the transactions you have made.

Flaws of Bitcoin tumblers

If you remove the benefit of keeping transactions and identities private from the picture, little is left regarding the benefits of using a Bitcoin mixing service. Firstly, one major flaw of crypto mixers is supporting only one asset type at a time and only in a determinate amount (e.g. only in batches of 1 BTC at a time per mixer), thus severely limiting their privacy prospect.

Most crypto mixing services also operate in legal obscurity and might get you in trouble if your jurisdiction introduces a law against them and applies it retrospectively. On top of that, the unchartered territory of crypto mixers is riddled with scams, seizures, outright fraud, and shutdowns.

Fraudulent services aside, some cryptocurrency mixers provide somewhat flawed privacy. With the help of blockchain forensics and analytics firms, law enforcement agencies can bypass some of the mixing models these services use. This is particularly true when it comes to KYC’d accounts in centralized exchanges, for example.

Major crypto exchanges like Binance have begun blocking crypto transactions originating from mixers or freezing the accounts of users receiving or sending funds connected to mixing services. These companies cite money laundering and compliance with existing regulations as the reasons behind the clampdown, and they are not far from the truth.

Another problem with mixers is – how to make them profitable or even self-sustaining? It is the reason several current schemes are broken. Furthermore, these mixers often request users to withdraw the exact number of coins they put in, and only accept one type of asset. This makes mixers inconvenient and limits the scope of the privacy they're able to provide.

In essence, crypto and Bitcoin tumblers aren’t ideal for financial privacy because their flaws pose some unique challenges, particularly on the compliance side. Even though mixers aren’t inherently bad, they might be better positioned to succeed if they tackled regulatory concerns first and foremost.

All about privacy coins

A second popular way through which one can send crypto privately is through privacy coins. Unlike open ledger networks such as Bitcoin or Ethereum, privacy coins can offer greater obscurity.

By creating Layer-1 blockchains that are inherently more private than their pseudonymous counterparts, privacy coins go beyond what is possible with crypto mixers. This has attracted attention from privacy enthusiasts, financial regulators, and exchanges alike.

How do privacy coins work?

Privacy coins keep the flow of money on their networks from the public eye, usually by restricting vital information involved in a transaction (e.g.,wallet addresses, transaction amounts, senders’ and receivers’ wallet addresses, etc.) from public view. If you send a private coin to another address, other users cannot access the details of the transaction, as is the practice with Bitcoin and other open blockchain networks.

Popular examples of privacy coins are Zcash and Monero, which employ different methods to achieve privacy.

Monero transactions use three different mechanisms to hide transaction data. First, users send or receive coins with stealth addresses, which resemble one-time passwords that cannot be used twice. Then, Monero uses ring signatures to mix up actual transactions with old and fake transactions and ringCT, a privacy technology, to hide the transaction amount. This additional data has a significant impact on transaction fees, which however remain low due to Monero's small volume of transactions. At the time of writing, Monero has a market cap of $2.6B.

Diagram showing how Monero’s untraceable payments work (Source).

Zcash employs a different mechanism, incorporating an optional switch between transacting publicly and privately. The network receives a message validating each private transaction via zero-knowledge proofs, and this message withholds any additional information on the transaction. At the time of writing, Zcash has a market cap of $814M.

Other examples of privacy coins include Beam, Grin, and Firo.

How can you use privacy coins?

On a fundamental level, privacy coins operate in a similar fashion as those within open ledger blockchains. Like their counterparts, they hold qualities such as immutability, verifiability, distribution, and decentralization. As such, you can send or receive privacy coins with a cold or hot wallet, and some are available for trading on centralized exchanges. However, many exchanges like Coinbase UK and Bittrex Global have recently delisted privacy coins.

To use Monero ($XMR), for instance, you would need a Monero GUI wallet. After setting up the wallet, you can buy $XMR on a centralized exchange or through a peer-to-peer network and transfer your coins to a Monero wallet.

Other private currencies like Zcash are also available on centralized exchanges, offering optional privacy functions like PrivateSend for Dash and shielded transactions for Zcash (ZEC).

Pros and cons of privacy coins

Like every innovation in the crypto space, privacy coins have their good side and also come with certain flaws.

For starters, you can keep your financial information away from the public with privacy coins, regaining control over how much information you want to disclose online.

A privacy coin keeps the details of transactions hidden, protecting the identities of both parties against third-party privacy violations. The record of such transactions exists, but the sending and receiving addresses, and the amounts involved, are unavailable to others, unlike on a public ledger.

On the flip side, privacy coins occupy a precarious position on the books of centralized exchanges. Remember that we mentioned how you could access privacy coins through centralized exchanges? Under the Financial Action Task Force Travel Rule, exchanges are required to share information on transactions with law enforcement agencies on request. The absence of clarity on this subject has made certain exchanges delist privacy coins.

Also, the question of legality hangs in the air. In some jurisdictions, privacy coins are as good as illegal, with their trading fully banned in South Korea. The United States is towing a different path, focusing on developing technology to crack privacy on the blockchain. They even offered a $625,000 bounty to anyone who could crack the Monero network.

Besides issues around legality, privacy coins seriously lag behind in terms of DeFi innovation. Open ledger networks such as Ethereum, with its Layer-2 solutions, are massively ahead in terms of offering a range of decentralized financial services such as lending, borrowing, stablecoins, etc. This limits the use of privacy coins to simple transactions, making them less attractive in comparison.

The lack of privacy in the existing DeFi ecosystem then raises an important question: what can we do to incorporate privacy into what already exists? This is where Panther comes into the picture to solve a previously unsolvable problem.

What is Panther Protocol?

In the world of Decentralized Finance (DeFi), the public nature of most L1 blockchains, while offering transparency, has the side effect of robbing traders of their advantages. Alphas and strategies become non-existent or less effective when surveillance and observation of a DeFi user's strategy and transaction records are possible.

With Panther, DeFi users can keep their transactions private while ensuring compliance with regulations as they trade on the blockchain. Panther integrates with the existing DeFi ecosystems on multiple chains rather than trying to reinvent the parts of them (e.g., protocols, underlying structures, etc.) that are currently most popular and in use. Through this, Panther aims to create a cross-chain interoperable privacy-preserving DeFi ecosystem for all players to thrive.

The technology behind Panther

Panther restores privacy through zAssets, versions of regular digital assets that enhance privacy with zero-knowledge proofs. zk-SNARK cryptography (short for zero-knowledge Succinct Non-interactive Argument of Knowledge) allows users to provide proof of transactions without giving up sensitive information, ensuring compliance without violating privacy rights.

Panther’s unique architecture, from our whitepaper.

Panther's zAssets operate across several blockchains and allow users to protect their privacy as they interact with DeFi applications. Presently, Panther is building on several networks, including Elrond, Ethereum, NEAR, Polygon, Flare, and more. Panther’s native token $ZKP governs the Panther ecosystem and is used to reward users for enabling the protocol’s privacy.

Using Panther Protocol

DeFi traders can mint zAssets by depositing their corresponding digital assets into Multi-Asset Shielded Pools (MASPs). They can then use their zAssets across different blockchains through a system of private bridges. Rewards are available for users that deposit and interact with the shielded pools.

For instance, when you deposit USDC into the pool, you can mint the corresponding privacy-enabled zAsset, zUSDC, which breaks the on-chain link and allows you to transact privately. After transacting, you can redeem your deposited USDC to a new stealth address, and the zUSDC is removed from circulation.

Panther also supports a feature called Panther Reveals, which allows you to disclose parts or the totality of your DeFi history if required by KYC verification, regulators, and financial institutions.

Final thoughts

The discussion around the subject of privacy on the blockchain may never cease. Users continue to clamor for increased privacy while regulators grow wary of the solutions currently in the market. Cryptocurrency mixers and privacy coins have enhanced users' privacy on the blockchain, but this has come at the cost of coming under scrutiny due to their lack of compliance concerns.

Panther solves this dilemma with a comprehensive solution, ensuring users can send and receive cryptocurrencies privately and compliantly. Panther offers an end-to-end DeFi solution that enhances trust on the blockchain and gives users control over the information they share.

The future of privacy will thrive in an ecosystem where there’s no additional cost or barrier for a law-abiding citizen to exercise their right to privacy. We’re at an important juncture of building a decentralized financial world – a global monetary system built on the ethos of transparent, private, and censorship-resistant.

It’s time to realize that our right to financial privacy cannot be ignored while building an open financial system.

About Panther

Panther is a decentralized protocol that enables interoperable privacy in DeFi using zero-knowledge proofs.

Users can mint fully-collateralized, composable tokens called zAssets, which can be used to execute private, trusted DeFi transactions across multiple blockchains.

Panther helps investors protect their personal financial data and trading strategies, and provides financial institutions with a clear path to compliantly participate in DeFi.

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