Do you associate cryptocurrencies with privacy? Well, you’re not the only one. You and most people not so familiar with blockchain technology, however, have been misguided. In reality, most cryptocurrencies provide only the basic components of anonymity.
The blockchain is a public ledger of your transactions. Even if there are privacy-focused coins like TeleCoin, Monero, or Zcash that implement different approaches, in the case of the most popular ones (Bitcoin, Ethereum, and Litecoin), you are just benefiting from a false sense of anonymity. When using these popular coins you are, supposedly, using an anonymous address that nobody knows you’re the owner of. However, all of the funds transacted in and out are visible to anyone curious enough to look, like the governmental authorities, for example.
So, the process is the same as using cash in a store where nobody knows you. Your transaction was taken in by the cash register (same as the blockchain in regard to cryptocurrencies), but nobody asked for your ID. The only confirmation from your part is the physical cash bills that can’t be traced back to you. However, if anyone recognized you in the store, that changes everything.
Your privacy is protected until is proven otherwise. The same goes with cryptocurrencies. If someone can match your Bitcoin address to your identity, your privacy is compromised.
Who’s putting your privacy in danger?
Being aware that there are companies already developing software able to track digital identities on the blockchain, such as Polycoin, Coinalytics, and Chainalysis (with the latter providing these investigatory tools to law enforcement), privacy becomes a much larger concern for cryptocurrency users.
Although these tracking programs work on most coins and tokens, there is one category that is constantly developing technological solutions to protect their users’ privacy. These are the privacy-focused coins that are designed to be private by default by hiding transactions details. They are still using an open ledger that is public, this is of course how decentralization works. The only change is that the transaction information is obfuscated to a certain degree. The amount transacted on the network remains public, but only the persons involved in the transactions will be able to tell what addresses are involved in any given trade. This sounds like the level of privacy we are expecting from a financial transaction, right?
There are different and successful, approaches to solving the privacy issues of cryptocurrencies. Here are the popular ones:
- TeleCoin designed a Proof-of-Stake privacy token with Masternode capability, TELE. Masternodes are used to protect transaction details through coin-mixing technology, guaranteeing zero confirmation transactions and allowing for decentralized blockchain voting. We are going to detail their particular solution more because of their unique approach.
- Monero still uses the Proof-of-Work protocol, but they implemented ring signatures in order to protect the identity of the ones involved in a transaction. Ring signatures replace the personal signature in a transaction with a collective signature of a group of possible signers.
- Zcash network is no different than the usual blockchain structure with one addition: fully encrypted data on the blockchain. It allows two types of transactions: public ones (non-encrypted) and private ones (encrypted). The technology is called zero-knowledge cryptography, which allows the network nodes to verify the transaction as valid under the network’s consensus rules without going past its encryption.
- Cloak offers two types of encryption for its users to choose from. One is a peer-to-peer solution called onion-routing privacy protocol (encrypting messages with many layers, much like an onion) and the other is called Enigma, where the transaction data is shuffled with random data. In the second case, only Enigma nodes are able to identify whether the input and output data is accurate.
As you can tell, most of these cryptocurrencies just “patched” the already established blockchain structure. Zcash is encrypting the transaction data but this makes it hard to track simple stats that should be available to any investors, like the current circulating supply. Monero improved the signature part of a transaction, but it makes it really difficult to implement a working wallet for its tokens, affecting its adoption. Cloak definitely brought an improvement in terms of encryption, but it still has a long way to go to become usable. That’s where TeleCoin distances itself from its competitors.
PoW or PoS for increased privacy?
TeleCoin is based on the same principles as the blockchain: a chain of blocks that have digital signatures. Transferring TELE coins requires you to sign the hash of the previous transaction and the public key of the receiver. All of these transactions are then broadcasted publicly to a consensus-based network.
While many coins are actively reaching consensus through the Proof-of-Work (PoW) protocol, TeleCoin is only using it for a limited period of time to incentivize users to join the network, become a node, and establish a community. However, PoW requires an expensive computer calculation, also called mining, which is slow and inefficient in the current environment. Only knowing that it was first introduced in 1993 makes you think that better alternatives might have been invented in the meantime. Well, that better alternative is called Proof-of-Stake (PoS). From the 10,000th block, TeleCoin will switch to the PoS protocol, where the user only needs to show ownership of a certain number of cryptocurrency units if they want to participate in block creation.
PoS allows the TeleCoin network to step into the future of cryptocurrency and become a pioneer of supporting efficiency and performance into the crypto space. While other protocols, especially PoW, require expensive hardware and a fat electricity bill, with PoS, the TELE wallet can be run on most consumer laptops. A TELE owner of 1%, for example, of all the coins in existence would directly weight a stake of 1% on the network which brings him/her a 0.8409 reward for every mined block. It’s not only about getting passive income, but it’s also about being an active participant of the network.
What about the Masternodes?
First, PoS and Masternode technology have two things in common: staking coins for passive income and keeping the network secure. However, Masternodes don’t usually create new blocks, they only have the power to reject blocks and verify transactions; Masternodes are a way to enhance a network based on a PoW or PoS protocol. Dash was the first coin to introduce Masternodes as an upgrade to its PoW protocol. PIVX took the opposite approach using Masternodes along PoS.
In the case of TeleCoin (which is built on top of both Dash and PIVX), Masternodes, while still not being involved in the block creation, have a much more important role regarding the transactions privacy.
TeleCoin Masternodes are involved in every feature of the network:
- Obfuscation, the process in which the transactions are made harder to trace, of the collateral held in Masternodes is utilized for coin mixing.
- SwiftTX, the guaranteed faster, zero-confirmation transactions are possible due to the collateral staking in Masternodes being used to send to the receiver in seconds.
- The decentralized voting system of TeleCoin, in which future advancements are determined through mutual consensus is based on the participation of Masternodes.
Running a TeleCoin Masternode requires 10,000 TELE tokens as collateral. Masternode participants are rewarded at a slightly higher level as compared to just staking through the PoS protocol due to their importance across the network. There’s no restriction in being an active participant of the network, staking, or becoming a Masternode. In fact, there is a guaranteed reward for everyone involved.
Cryptocurrency needs privacy
Following the recent actions from the governments of China and Korea, it remains clear that privacy becomes a requirement for any cryptocurrency that wants to stay alive in the fight with the authorities. Technological advancement will be made on both sides, cryptocurrencies and government’s tracking software. That’s why the solutions that worked some time ago are no longer viable today. We should be looking towards different approaches and projects that are willing to use the technology that works today so we can build upon the one that will work tomorrow.
How PoW, PoS, and Masternodes Work Together for your Privacy was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.