Remember the spring of 2017? Altcoins were booming. Every other week new ERC-20 tokens were minted, shilled, pumped, and dumped. For the day-trader, it was a feeding frenzy like no other. Newbies went broke as the skilled got rich. And early adopters sat staring at green for months.
All of it seemingly based on obscure whitepapers, contemporary looking websites, hype, and Twitter announcements. Now, it’s happening again. This time you can leave your Ethereum at the door. The star of this show is Monero.
Monero, as you know, is everyone’s favorite untraceable and fungible cryptocurrency. It’s a community project and open source, using a proof-of-work mining algorithm CryptoNight. Like Bitcoin before it, it’s going through a sort of renaissance; forks aplenty. With over 50 different CryptoNight coins, including Monero forks such as Wownero, there’s a lot of ideas brewing.
You can forget Initial Coin Offerings (ICOs) too. These projects are focusing on development first. Build a product and let it grow naturally. Here are some of the most intriguing projects in the space.
Top CryptoNight Projects
Wownero plans to meme its way to the moon and become Monero’s DogeCoin with over-the-top ring signatures and bulletproofs. Others like Loki plan on bringing Monero’s famous anonymity to messenger applications. While less-inspired projects like Sumokoin and MoneroV have embraced the status quo and ASICs. And projects like Masari promising the ever elusive low hanging fruit that is ‘scalability.’
Others are a bit more ambitious. Projects such as Haven Protocol hope to create a stable off-shore banking system utilizing a dual coin blockchain. While Graft aims to become the Paypal of crypto by servicing real-time payment solutions and atomic swaps. Not to mention BitTube; the anti-censorship Youtube clone with a built-in cryptocurrency payment system.
There’s even an “Ethereum of Monero” named Dero looking to bring proof-of-work and anonymity to smart contracts. Using the familiar Golang coding language. Like in the golden age of ERC-20 tokens, the possibilities seem endless.
No ICOs; Development First, Funding Later
These aren’t Initial Coin Offerings (ICOs) either. As Turtle Coin’s homepage points out; there are all too many projects pumped on promises and no product. For the most part, Monero forks and the CryptoNight coins like them are unfunded projects with nothing more than a few passionate devs and lofty goals; believing value will create itself.
There’s no shortage of ideas or coins. With small market capitalizations and lots of room for ‘mooning,’ it’s a penny trader’s dreamland; an early adopters clearinghouse. Even in this bear market, these little-known coins are being pumped and dumped on a daily basis. All happening on courageous homebrew exchanges like TradeOgre.com.
The “Penny Stocks” of Crypto
Established in January 2018 Trade Ogre has become a consistent, and little known, exchange with coin offerings rarely seen on major exchanges. Offering more than just Monero forks and CryptoNight coins, such as Ethereum and XRP, Trade Ogre’s is an altcoin feeding frenzy all to itself. Its user interface is simple and Trade Ogre is K.Y.C free (no need to verify your ID). It even has 2FA.
Intuitive and easy-to-use, Trade Ogre’s offerings may even seem overwhelming; much like Cryptopia’s. All you need is some Bitcoin, or Litecoin, an email you can verify and you’re ready to go. You may need to invest some time downloading, learning how to use new wallets, and visiting a couple Githubs. But that’s part of the fun.
If you’d like to join Monero’s renaissance without trading, your Bitcoin mining is always an option as well. You can view a list of CryptoNight coins and mine at https://cryptoknight.cc/. Most of which are listed for trade at Trade Ogre and Cryptopia.
Either way, let’s hope this trend continues and more exchanges like Trade Ogre begin popping up; as well as a few more coins. Be careful out there!
Disclaimer: the author is involved in the Wownero project as a designer and artist.
Zcash offers the choice between transparent and fully private transactions, using zero-knowledge-proof cryptography to obscure the data.
The Department of Homeland Security document wants to analyze Monero and Zcash for criminal activity. The document reads: “There is similarly a compelling interest in tracing and understanding transactions and actions on the blockchain of an illegal nature.”
How exactly they will achieve it is not yet outlined in detail and the report stresses that it is not an explicit request for proposals. However, the report tentatively suggests: “[Designing] a blockchain analysis ecosystem or modify an existing one, that enables forensic analysis for homeland security.” Further, it invites interested parties to comment on the topic.
Proof of Work is the algorithm that powers various blockchains, like Bitcoin, Ethereum, Litecoin, and Monero.
Miners solve complex mathematical puzzles using computer power to produce a “block” of transactions.
When a block is produced, the miner is rewarded with the native cryptocurrency: bitcoin, ether, or litecoin, for example.
Proof of work ensures that blocks are produced at a stable rate and are accurately verified.
Cryptocurrencies work on the principle of a blockchain, where blocks containing transactions are added to the chain to make transactions happen.
The issue is, the speed and validity of blocks must be kept in check. Proof of Work solves this issue, let’s check out how.
Blocks on the blockchain are quite powerful as they confirm the transaction of money between addresses. They also distribute new currency by issuing rewards to the block creator.
For these reasons, there are two important rules for block production.
Blocks need to be verified some way, so that we know what order transactions happened, among other things.
We need to control the speed at which blocks are added. If the speed is not controlled, block rewards are added to the network quickly and the worth of the currency plummets.
Bitcoin, for example, has a target block time of ten minutes. If blocks are created too fast, too much bitcoin will be given out to miners, thus flooding the market. Something has to keep that block time regulated.
Enter Proof Of Work
Proof of work solves both of our issues. It’s based on the idea that we include some data in the block that is hard to calculate, but easy to verify.
Hash algorithms are perfect for our verification problem but don’t fix the issue of timing on their own.
Hashes are designed to be fast to compute, very fast in fact. The time it took to calculate the above two hashes was less than one-hundredth of a second.
But we need to regulate the time, so blocks aren’t produced too quickly.
We have a simple solution to this: network difficulty.
Simply put, you can change how long it takes to create a block by making it harder to solve the cryptographic puzzle.
Usually, that means including a constraint that the hash must be below a specific number. And that that number is calculated at specific intervals.
Now miners have to hash their blocks many times, with each one taking up some time and lots of computer power. In order for the block creator to change the hash of their block, an additional bit of information is added to the block called thenonce.
A nonce is simply a number that can be modified as the block creator sees fit to change the output hash.
Each time a hash is calculated and does not meet the requirements of the network at that time, the nonce is incremented or otherwise changed and the hash re-calculated.
Often a miner will try a very large number of different nonces before they find one that will be accepted by the network. The total time all miners take to find a block should be somewhere around the block time (ten minutes for Bitcoin).
And if not, the difficulty is adjusted to keep the timing in line.
Not all Proof of Work Algorithms are the Same…
The hashing algorithm a cryptocurrency uses directly affects how difficulty will work, and what hardware you can run the mining software on.
To use Bitcoin as an example again; Bitcoin uses the algorithm SHA-256, which is an industry standard hashing algorithm used in many places.
If you’ve saved a password on a website, odds are it was hashed with Secure Hash Algorithm (SHA)-256 before it was stored. Using industry standard hashing algorithms means they are proven secure and worked on by massive communities.
However, using industry-standard algorithms is both a blessing and a curse.
A blessing because most hardware will be able to run your software. But a curse (depending on how you look at it) due to one word: ASICs.
ASIC (Application Specific Integrated Circuits) are mining hardware that gives your network a massive amount of mining power. That increases centralization due to price and power demands. The more ASICs you own or control, the more of the network you command.
Some other cryptocurrencies, like Monero, use their own hashing algorithm specifically designed for use in proof of work systems. These have the advantage that developers have complete control over what hardware the algorithm works on best.
Downsides to Proof of Work
There are a few downsides to Proof of Work when compared to other solutions.
First, Proof of Work requires a lot of computing power. And, the more mining power on the network, the higher the difficulty. Meaning that you very quickly run into a situation where those with the cash to buy hardware do. And when you have a lot of hardware, you tend to store all their hardware in one place, leading to centralization.
At worst, this could lead to a 51% attack, whereby one actor, or group of actors, control more than half of the network. If that happens, they could theoretically “double spend” the cryptocurrency on the network.
And second, that computing power needs a lot of electricity to run, and at the high end, miners go looking for the cheapest power possible. This means that miners start to congregate in cities or countries where the power is cheap, again leading to centralization.
Privacy is a topic that doesn’t come up as often as it should in the cryptocurrency world, which is funny, considering their cryptographic background.
Cryptocurrencies like bitcoin have a reputation for anonymity, but they are not as private as you think. Most don’t offer any explicit or built-in privacy features.
Take Bitcoin, for example. Every transaction is recorded in an open and public place – the blockchain. Due to this, a malicious actor can see every transaction ever made with a simple search. They can see every public address and potentially link it to a person’s true identity.
Your transactions can be traced in much the same way a bank can trace your transactions as they move through its system.
What Features Should a Privacy Cryptocurrency Have?
Now that we know why privacy is a good idea, let’s put together a wishlist of what we’d want in the perfect privacy cryptocurrency.
a. Opaque Transactions
Opaque transactions are those that do not show the sender’s address, the receiver’s address or the amount transferred.
The rationale behind wanting opaque transactions is very simple, why should everyone be able to know who you are transacting with?
If a malicious actor knows who you are transacting with, they may be able to use that information to pressure you. Or, a malicious actor can figure out which addresses are worth attacking by looking at the amount being transferred in and out.
b. Provable Transactions
Opaque transactions are wonderful but sometimes you need to be able to prove to someone that the transaction was sent. For example, to prove that a donation took place, prove that you actually paid a vendor for goods or to prove a transfer to an escrow took place.
c. Default On Privacy
Having private transactions is great, but the next problem is getting people to use them.
Only one privacy coin is automatically private right now. All others offer an option between a standard transfer and a private transfer.
If your privacy system requires extra steps to use, most users will end up taking the easier, less-private approach.
Having some transactions be private and others not private simply draws attention to the ones made private. All transactions being the same makes the attacker’s job a lot harder, as there’s nothing drawing attention to itself.
“Trustless” means not having a third-party store data or make the transaction. The current banking system, for example, is not trustless, because you must trust the bank to verify your funds and make the transaction on your behalf.
It’s a pretty standard request for any cryptocurrency, but more so for privacy cryptocurrencies due to the fact that any hole in the armor makes the entire cryptocurrency weakened at best.
Any privacy cryptocurrency that requires a trusted setup should be considered very carefully.
e. Obfuscated IPs
One issue that doesn’t come up as often as it should, even some of the most private cryptocurrencies, is that your IP address is exposed to the network when you broadcast transactions.
This means that someone listening very carefully can figure out where in the world a transaction came from, and potentially which transactions belong to you. From there they may or may not be able to find out further information about the addresses involved, and how much was transferred. In general, it’s a good idea to look as uninteresting as possible.
Keeping your IP to yourself, or using some sort of anonymization layer (like Tor, or I2P) is a good idea. For a privacy coin, having first-party support for such anonymization layers is definitely a plus.
Monero vs Zcash: Best Privacy-Oriented Cryptocurrencies
Now that we have some grounding in what it means for a cryptocurrency to be private and why privacy is a good thing. Let’s take a look at the two best-known privacy cryptocurrencies, Monero and Zcash, to see how they stack up against our wishlist.
Monero tends to be the flagship privacy cryptocurrency. It offers various features and covers our wishlist well.
a. Does Monero Use Opaque Transactions? ✔
Monero’s transactions are opaque. They make use of a technology called Ring Signatures (and, more recently, Bullet Proofs) to hide the sender and amount transferred in a transaction. It does this by mixing various transactions together, creating “decoys” that are difficult, if not impossible, to trace back to a specific person
A one-time-use stealth address is also used for receivers so you can’t be linked to multiple transactions.
b. Does Monero Offer Provable Transactions? ✔
You can prove a transaction occurred on the Monero network by use of a view key, which can be created for both a single transaction and an address.
c. Is Monero Private by Default? ✔
Monero’s privacy model does not allow for non-private transactions to occur on the blockchain. No matter what, your transaction will be private, though you can share a key with others to allow them to look at your transactions in the same way your wallet does.
d. Is Monero Trustless? ✔
Monero’s entire network requires no external trust to use, assuming you are running your own node, anyway. Like with most cryptocurrencies using an external node for your transactions carries some risks around logging. Though even if your transactions are logged, they will remain private.
e. Does Monero Obfuscate IPs? ✘
Monero does not currently have any sort of built-in IP obfuscation. Meaning that your IP can be logged by other nodes when broadcasting transactions.
Though there are some plans for this in Monero’s future, namely, a technology called Kovri which will route and encrypt transactions through I2P Invisible Internet Project nodes.
For the moment, if it is required, IP obfuscation can be achieved via third-party anonymization tools like Tor and I2P.
Zcash offers both private and transparent transactions. A few of the boxes in our wishlist are checked by Zcash, but unfortunately, some of the more major ones are not.
a. Does Zcash Use Opaque Transactions? ✔
ZCASH offers a completely private transaction, known as a “shielded” transaction. With a shielded transaction, neither the addresses or amounts involved are visible on the blockchain. To achieve this, Zcash uses a cryptographic technique called “zero-knowledge proofs.”
Monero also uses a version of zero-knowledge proofs, but Zcash’s system is different in that it requires a small level of trust in its setup. We discuss this in the fourth section below.
b. Does Zcash Offer Provable Transactions? ✔
When the private transaction type is used, those on the secure side can disclose information via an experimental system. It allows you to prove a transaction was made without revealing information about the sender. However, it’s not a simple process.
c. Is Zcash Private By Default? ✘
ZCASH’s privacy scheme is not on by default, meaning that some effort is required for its users to send private transactions. There are four different possible ways for a transaction to occur. Only one of which is completely private for both parties. The other three are sender private, receiver private, and completely public.
A private transaction takes longer and costs more in fees. However, a recent Zcash upgrade aims to reduce the friction and move Zcash to a privacy-by-default system.
d. Is Zcash Trustless? ✘
ZCASH’s zero-knowledge proofs, known as zk-SNARKs, do require trust of third parties. Specifically, some parameters need to be generated and the source material destroyed. The issue with this is that if the source material for the parameters is not destroyed, those that have it can use it to create verified transactions.
The risk is mitigated somewhat by making the source material distributed. That way any one person that helped generate the data can destroy their source material and render the rest useless. Though that does not make the fact that a trusted setup is required, which, in the world of cryptocurrency, is a bad idea.
e. Does Zcash Obfuscate IPs? ✘
Much like Monero, ZCASH does not currently support any built-in IP anonymization technologies. Though running a ZCASH node over Tor does work. So if you do need the additional privacy you have the option of using Tor.
Monero vs Zcash: Which is Better?
While Monero and Zcash have their merits, Monero takes the crown for privacy, checking all but one of the items off our list. But Zcash has more control over how your transactions are done, at the cost of always-on privacy. Zcash’s trusted setup is also questionable, but unlikely to cause an issue in all but the most extreme case.
Bottom line, It’s up to you as the user to decide what cryptocurrency to use. And to weigh pros and cons against your use case. If you want absolute privacy, Monero is your go to, there is nothing quite like it currently. Otherwise, if you want to be able to send both private and transparent transactions, consider Zcash.
At the FinTech Canada conference this August, leading cryptocurrency trial attorney Brian Klein gave an excellent overview of how cryptocurrencies have been used for illegal purposes and what law enforcement officials are doing to crack down on it.
In his talk, Klein points to the law enforcement efforts and litigation around the Silk Road as an early example of crime with a cryptocurrency element. At the time, the closure of the online black market and related arrests made headlines worldwide.
But how have things moved on in 2018?
Cash (not Crypto) is Still King in Criminal Activity
In criminal law, cash is still king.
While cases like the Silk Road made sensational headlines, cryptocurrency rarely plays a truly innovative role when it comes to more traditional criminal activity.
The crypto element may add a modern flair and conjure images of shadowy figures in Guy Fawkes’ masks but, for the most part, digital currencies remain a payment method rather than a new frontier in criminal acts.
Cryptocurrencies Are the New Swiss Bank Account: Money Laundering and Tax Evasion
You might still see movies where bank robbers demand that funds be wired to a Swiss bank account, but when it comes to money laundering and hiding assets, cryptocurrency has increasingly replaced the wiring of funds to jurisdictions that favor banking secrecy.
A key advantage of cryptocurrency is that it’s not tied to a single jurisdiction or set of laws – unlike Switzerland, which tightened its banking regulations after a large tax evasion investigation in 2008.
With cryptocurrency, there’s also no need to rely on intermediaries to handle transfers. And while a bank can be forced to turn over someone’s account information, there is no central authority for the Bitcoin system.
However, as noted in Klein’s talk, most current digital currencies operate on a public, permanent ledger. Bitcoin, for example, isn’t fully anonymous as many believe. Each transaction can be tracked, analyzed and de-anonymized — if the authorities can link a wallet address to a particular criminal – now or in the future.
The Emergence of Privacy Coins
Privacy coins circumvent some of the potential risks of making cryptocurrency transactions available on a public ledger.
Indeed, Bloomberg noted that criminals are increasingly ditching bitcoin for privacy coins like monero and zcash.
While there are different types of privacy coins, they typically obscure their ledger through a variety of methods including single-use wallets and transaction keys, as well as “coin mixing”, which involves pooling different transactions together to obscure the amount and parties involved in any given transaction.
In his talk, Klein notes that privacy coins are a key source of concern for law enforcement and regulatory agencies.
Fraud and Initial Coin Offerings (ICOs)
Reports suggest that as many as 80% of ICOs offered in 2017 were fraudulent.
Perhaps the largest was Pincoin, an ICO that raised $660 million during the ICO fever of 2017. Shortly after raising the money, Pincoin vanished, taking investor money with it. This is what’s known as an “exit scam.”
As a result of these scams, investors have asked securities regulators to intervene. The problem? In the US, there’s no set answer on whether ICOs are “securities.”
What’s a security? A security is a financial instrument, like a stock, bond or investment contract, that you are able to trade or transfer to someone else. If something is a security, it is often subject to regulation and must be registered with the regulators.
Until ICOs are classified as a security, we don’t know if they are something the Securities Exchange Commission (SEC) can regulate.
So long as they remain unregulated, ICOs fall outside the oversight and authority of securities regulators, potentially leaving investors more exposed to fraudulent activity
Although the SEC’s Chairman has previously claimed that ICOs are securities, the issue is still relatively untested in the courts. This leaves many ICOs operating in a grey area.
How Are Law Enforcement Officers Cracking Down on Illegal Crypto Activity?
This is still relatively new territory for law enforcement agencies and governments. However, they are increasingly capable of de-anonymizing transactions and tracking criminal activity. Below are just a few of the ongoing themes of law enforcement activity in the crypto space:
Governments and law enforcement are collaborating on an international scale. This includes sharing information, joint investigations, and global agreements around extradition.
Law enforcement is increasingly capable of tracking cryptocurrency transactions, especially where the ledger is public. AI and machine learning are also making it easier to analyze the blockchain and pierce anonymity.
On the blockchain, transaction history is not just public – it’s permanent. This can create a permanent chain of evidence for law enforcement to review and rely on, especially over time, as new data is gathered and different wallets and accounts are identified.
Bitcoin has been linked to illegal activity ever since the infamous Silk Road black market emerged. The cryptocurrency ecosystem has also played host to its fair share of scams, hacks, and frauds.
However, we should also remember that every bitcoin transaction, by design, is recorded in a permanent, transparent log. If bitcoin is used for nefarious purposes, that transaction is preserved forever.