Bitcoin
Monero
ledger">Why Privacy Matters on a Public Ledger
Bitcoin's blockchain is often mischaracterized as anonymous. It is, in fact, pseudonymous: every transaction is permanently and publicly recorded, linked to addresses rather than real names, but with sufficient on-chain data and off-chain information, transactions can be traced back to individuals. Blockchain analytics firms like Chainalysis have built multi-hundred-million-dollar businesses on exactly this traceability.
For certain use cases — salary payments, medical expenses, confidential business transactions — pseudonymity is insufficient. The privacy coin ecosystem emerged from a straightforward question: can a cryptocurrency offer meaningful confidentiality while remaining trustless and decentralized? The three major approaches to this question — ring signatures in Monero, zero-knowledge proofs in Zcash, and Mimblewimble in Grin — represent genuinely different cryptographic philosophies, with different privacy guarantees, different performance profiles, and different regulatory responses.
Monero: Mandatory Privacy Through Ring Signatures
Monero, launched in 2014 as a fork of Bytecoin, makes privacy mandatory for all transactions. There is no option to send a transparent transaction; every Monero transaction uses the full privacy stack by default. This design choice has profound implications for the system's privacy guarantees.
The privacy in Monero comes from three interlocking mechanisms. Ring signatures obscure the sender: when a transaction is signed, it is signed by a "ring" of multiple potential signers, making it cryptographically impossible to determine which ring member actually authorized the transaction. Stealth addresses obscure the receiver: instead of publishing a permanent address, recipients publish a public key, and senders derive a one-time address for each transaction. Key images prevent double-spending despite the ring signature ambiguity: each UTXO has a corresponding key image that can be revealed on spending without revealing the actual key, allowing the network to detect if the same output is spent twice.
The third mechanism, RingCT (Ring Confidential Transactions), added in 2017, hides the transaction amount. Using Pedersen commitments — a cryptographic technique that allows proving a sum is correct without revealing the individual values — RingCT ensures that observers cannot determine how many XMR moved in a transaction.
Together, these mechanisms create a system where the sender, receiver, and amount are all obscured. Unlike Zcash's optional privacy model, every Monero transaction contributes to the anonymity set for every other transaction. A surveillance actor analyzing the Monero blockchain sees ring signatures with multiple plausible signers for every input, stealth addresses that reveal nothing about the intended recipient, and hidden amounts throughout.
Monero's Limitations
Ring signatures have a key weakness: the ring size determines the plausibility of the anonymity. Early Monero used rings of size 2-5; current protocol requires a minimum ring size of 16. A ring of 16 means each input has 15 decoys chosen from the blockchain. Statistical analysis of decoy selection patterns, spending time distributions, and network-layer metadata has allowed researchers to narrow the anonymity set in some cases.
Monero's mandatory privacy comes at a cost in transaction size and verification time. A Monero transaction is substantially larger than a comparable Bitcoin transaction — typically 1.5-2 KB for a simple transfer versus Bitcoin's 200-300 bytes. This affects storage requirements and scalability.
Zcash: Optional Privacy Through zk-SNARKs
Zcash, launched in 2016 by a team including cryptographer Zooko Wilcox-O'Hearn and based on research by Eli Ben-Sasson and colleagues, took a different approach. Rather than modifying transaction signatures, Zcash uses zero-knowledge proofs — specifically zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Arguments of Knowledge) — to prove the validity of transactions without revealing their contents.
A zk-SNARK allows a prover to convince a verifier that a statement is true without revealing any information beyond the truth of the statement itself. In Zcash's shielded transaction pool, a sender proves: "I own funds in the shielded pool equal to or greater than the amount I'm sending, and the recipient's address exists, and the amounts balance correctly" — all without revealing which funds, which recipient, or which amounts to any outside observer.
This cryptographic approach offers theoretically stronger privacy guarantees than ring signatures. Where ring signatures provide plausible deniability among a finite ring of possible senders, a valid zk-SNARK proof reveals no information about the underlying transaction at all.
However, Zcash makes privacy optional. Zcash has two types of addresses: transparent (t-addresses, similar to Bitcoin) and shielded (z-addresses). Transactions between t-addresses are fully public; transactions between z-addresses are fully private. Transactions crossing between address types reveal partial information.
The fatal flaw of optional privacy is the anonymity set problem. If only a small fraction of transactions use shielded addresses, those users stand out. Surveillance actors can focus analysis on the shielded pool precisely because it is small. Zcash data has historically shown that a minority of transactions use full shielded-to-shielded privacy, significantly weakening the practical anonymity compared to the theoretical guarantee.
The Trusted Setup Controversy
Zcash's original zk-SNARK construction required a "trusted setup" — a multi-party ceremony where participants generate cryptographic parameters and must destroy their secret contributions. If any participant retained their secrets, they could create counterfeit Zcash without detection. Zcash organized elaborate ceremonies to minimize this risk, but the theoretical vulnerability exists.
Zcash's later Sapling upgrade and Zcash's ongoing work on Halo/Zcash's recursive proof system aim to eliminate the trusted setup requirement, addressing this criticism.
Mimblewimble: Privacy Through Structure
Mimblewimble, described in a 2016 whitepaper published anonymously (the author was later identified as Tom Elvis Jedusor — the French name of Voldemort — a Harry Potter reference), takes a third approach: privacy through elimination of explicit transaction data.
In Mimblewimble, transactions have no addresses. Instead, the protocol represents transfers as blinded commitments where only the sender and receiver know the blinding factor. All transactions in a block can be aggregated (cut-through): intermediate outputs that are created and spent within the same block can be eliminated entirely, since they leave no net effect on the blockchain state. The resulting blockchain contains only the minimum data necessary to verify that no coins were created from nothing and that all outputs are properly authorized.
Grin, launched in 2019 as an open-source implementation of Mimblewimble, carries no transaction amounts and no addresses on the chain. The blockchain is dramatically more compact than Bitcoin's, since cut-through eliminates transaction history. Privacy is structural: there are no addresses to trace and no amounts to track.
The practical limitation is user experience. A Mimblewimble transaction requires interaction between sender and receiver — they must exchange partial transaction data before the transaction is broadcast. This interactive protocol is incompatible with the familiar "send to address" model. Beam, another Mimblewimble implementation, addressed this partially with one-sided transactions, but the interactive requirement remains a significant barrier to adoption.
Mandatory vs Optional Privacy: The Core Debate
The privacy spectrum in the coin ecosystem reflects a genuine disagreement about design philosophy and regulatory positioning.
Mandatory privacy, as implemented in Monero, provides the strongest practical anonymity because it ensures a large anonymity set for all users. Every transaction contributes to the pool from which analysis must draw. The tradeoff is that mandatory privacy makes regulatory compliance difficult — there is no way to selectively disclose transaction details to an auditor or comply with know-your-customer requirements at the protocol level.
Optional privacy, as in Zcash, allows for selective disclosure. A user can share a "viewing key" that allows an auditor to see their shielded transactions without giving spending authority. This makes Zcash more amenable to institutional use cases where auditability is required. The tradeoff is that optional privacy undermines anonymity for those who do choose privacy.
The regulatory response has tracked this distinction. Monero has been delisted from several major exchanges under pressure from financial regulators; Japan and South Korea have banned exchanges from listing privacy coins. Zcash's optional privacy and viewing key mechanism have allowed it to maintain exchange listings in more jurisdictions.
From a pure cryptographic standpoint, Zcash's zk-SNARK approach offers the strongest theoretical privacy guarantee — zero information leakage for shielded transactions. From a practical standpoint, Monero's mandatory privacy often provides stronger anonymity because of the larger anonymity set. Mimblewimble offers excellent privacy with significant scalability benefits, constrained by usability challenges.
The privacy coin space represents the outer frontier of applied cryptography in public blockchains — each approach a real experiment in what privacy guarantees are achievable and what tradeoffs users are willing to accept.