With all the talk about Verge’s XVG coin in the news this week, many readers may be wondering what exactly “privacy coins” are. There’s no doubt that the new Verge partnership with MindGeek raised a lot of attention in the cryptocurrency community, but what does it mean? Certainly, a cryptocurrency partnering with an adult-entertainment website may not make sense at first glance. Let’s take a look at what privacy coins are and why they matter.
Privacy Coins in the Headlines This Week
Before going into the specifics of what privacy coins are, here’s a quick recap about why people are talking about them.
Verge, the company behind the XVG coin, announced a partnership with MindGeek. MindGeek is a company involved in the adult media industry. The company owns two of the most well-known sites online: Pornhub and Brazzers. XVG is now an accepted payment method on the Pornhub site.
This may seem a bit childish at first, but the partnership matters. The announcement means that there is now another real-world use for privacy coins. Prior to the XVG announcement, use-cases were far more scrupulous. Privacy coins used to be thought of as a method for conducting illegal activity. Coins with a privacy focus are often thought of as being used by criminals. Some of the most obvious cases include purchasing items illegally online. Products like firearms, narcotics, etc. are all purchases with untraceable cryptocurrencies. However, now there is a perfectly legal use-case that XVG is bringing to the market.
ELI5: What is a Privacy Coin?
To a certain extent, all cryptocurrencies are anonymous. When we look at the original bitcoin, for example, wallet addresses are not known publicly. There is no database saying “John Doe sent Jane Smith 0.03 BTC.” However, the transactions are all recorded publicly.
In crypto, when we talk about the “public ledger,” that is where we’re recording all the transactions going on. Even though the ledger doesn’t specify names, it does show public addresses and transactions. This means that if someone really wanted to, they can audit the records and potentially track down who owns which wallet(s). There are a variety of ways for your identity to get linked with your crypto wallet, but we’ll cover those in the next post. You just need to know that your wallet is not truly anonymous on its own.
Unlike traditional cryptocurrencies like bitcoin, privacy coins aim to solve that issue. Privacy coins have a public ledger just like other cryptocurrencies, but they work to obscure the owner of a wallet. All transactions are recorded publicly for the network to keep track of what’s going on. However, the biggest difference is that an interested third party can’t find out the owners of wallets.
Different privacy coins achieve this anonymity in different ways, so the method is dependent on the coin. The most important thing to know is that privacy coins shield the identity of the owner of the wallet from the public ledger.
Good Reasons to Use Privacy Coins
As mentioned earlier, there are some illegal reasons to use privacy coins, but what about the good ones? Not everything involving privacy-oriented cryptos is bad or illegal. In fact, there are a variety of good reasons to consider using privacy coins. Let’s take a look at a couple of them (besides the Verge example).
Account Balance and Safety
Chances are, you probably don’t want your bank account balance on display while walking down the street. Whether it be because you’re self-conscious and think it should be higher (don’t we all?), or because you’re well-off and don’t want to be a target, there’s good reason not to release private information openly to the world.
In much the same way, cryptocurrency wallets show how much of a specific coin the wallet owner is holding. Though you’re not “walking down the street,” the internet is the equivalent of just that in the cryptocurrency world. If you happen to have a very large amount of a specific cryptocurrency, would you want the entire online community to know just how large your account is?
Sure, some people may want to show off and brag about it, but many would see the increased risk that comes with it. By having your account balance information available to the online community, you run the risk of putting a massive target on your back.
Business Deals and Exclusives
Another possibility to consider is business deals. If a company is using cryptocurrencies to handle large business transactions, then it may be important for the information not to be public.
Perhaps a new product is coming out, or a new shipment of a high-value item is being released, the company doesn’t want their financial history to be public knowledge. Furthermore, the company starts assuming more risk as well, like the personal bank account, by having sensitive financial data published to the world.
There’s an even longer list of reasons as well, but I think we’re starting to get the idea now. There are so many good examples of why privacy coins are important in the crypto space. Sure, they may not be necessary for everyone and in every case, but they provide an important option. Stay tuned, later this week we’re looking at different ways your personal identity can be linked to your Bitcoin wallet address!