I'm back with Part 2 of this 3-part series on privacy coins. Part 1 gave us the background for why privacy coins exist and how they work to introduce fungibility to the payment network through various privacy protocols. Part 2 deals with how to evaluate the strengths and weaknesses of a privacy coin relative to others and according to your values and preferences. You've probably heard this before: “X is the best privacy coin”, or “Y is the first privacy coin to do Z”, or some variation of that. The altcoin space is highly speculative, and it is impossible to find unbiased information that has been succinctly compiled, even from me. This guide gives you a way to gather information while understanding what exactly that information means when it comes to analyzing a coin. When it comes to evaluating privacy coins, I'm going to be referencing a document called the Privacy Coin Matrix.[41] It is self-described as a “cross-team collaboration to create a comprehensive comparison matrix that can be referenced by everyone”[42]. The Privacy Coin Matrix referenced here is an open source project hosted in Google docs. It takes a minute of orientation, but if you are looking for useful way to compare privacy coins, the spreadsheet provides them in a comprehensive but not too technical fashion. It is the opposite of exhaustive but it is neutral. To repeat, it is the opposite of exhaustive but it is neutral. It already has close to sinless information on Monero, Particl, Dash, PIVX, Zcoin, Verge, Zcash, Zencash, Groestlecoin, Bitcoin Private, Nav-Coin, ZClassic, Bulwark, DeepOnion, Phore, Zoin, ColossusCoinXT, Spectrecoin, and Sumokoin.
The spreadsheet provides a starting point for research, allowing you to find your “single-issue” or “deal breaker”. It does not cover the sequence of development, drama of the projects, or issues of the past. It boasts some broad primary categories that are important when evaluating a coin, some of which I will go over. These categories include a basic description of the coin, its resources and history, coin specifications such as block time and security mechanism, blockchain information such as total size and genesis block date, development, trading statistics (in the works), supply and distribution, economics, privacy features, how well it scales, what wallets exist, a description of its networks and masternodes, and community information. Specific metrics are then listed under each category. With so much information provided, a comparison has to be made based on your own personal rubric, based on the coin’s technical specifications and how they align with attributes and values you consider important. To aid in that process, I will highlight some major trends and discuss the implications of some of the categories, which I will refer to as sections, as they relate to key characteristics of a privacy coin.
PRIVACY
Transaction privacy is the basic promise of a privacy coin and there is a clear distinction of which coins actually provide this. Under the Privacy section of the spreadsheet, you can compare privacy algorithms and see if sender, user and transaction amounts are hidden. You might also recognize from Part 1 the privacy protocols that provide these features. If the popular rankings of privacy coins were truly related to the privacy of the coins themselves, then the market penetration of coins such as Dash and Verge, that objectively have fewer privacy features than others, would be quite concerning. It is also clear that the two cryptocurrency moguls, Ethereum and Bitcoin, are sorely lacking in privacy features when seeing a direct comparison to the features of the privacy coins that came about as a result. Apart from the privacy algorithm used, this section also lists other features such as if privacy is optional and whether the coin supply can be audited. The other sections deal with common features of any cryptocurrency that may indirectly affect privacy, or be important when thinking about the payment network itself, in conjunction with privacy features. These can be important for security or existential threats to a privacy coin, such as how likely it is for double-spending to occur, how centralized the blockchain is, how resistant it will be to quantum computing. But if your main reason for using a privacy coin, is privacy, then the privacy section would be the most fundamental to your decision making.
DE/CENTRALIZATION
As listed under Supply and Distribution, you might find it surprising that about 30% of the listed coins have the top 100 addresses owning over 50% of the total coin supply. As pointed out in a post by Michael Spencer, "Dash and Bitcoin are the only two coins where the top 100 addresses own less than 20% of the total supply".[43] This must be compared to the total amount of addresses however, and decentralization can be defined and measured differently depending on who defines it. You may dislike the history of a coin. For example, zero-knowledge proof coins currently require a trusted set-up, and the initial distribution of a coin sometimes puts the majority of its wealth in a few hand either due to malice or just due to the number of individuals aware and interested. Reward systems can also be viewed as an issue to some but might be seen as a plus to others since it aids development. You might not like Dash’s masternode governance system or that Zcash has a private company that gets a founder’s reward. The distribution of a coins supply might leave you with a general feeling of 'unfairness'. But because many of these coins are first to market, with a few interested collectors at their early stages, the subsequent distribution may be unavoidable and likely to even out to some degree over time. Extreme centralization can result in bad actors being able to exploit the consensus mechanism, through 51% or double-spend attacks. The Network and Masternodes section of the matrix provides some information on this. Centralization is also affected by the consensus algorithm with disagreement over whether proof-of-work or proof-of-stake results in more wealth centralization or more disincentive to be a bad actor. Centralization does not necessarily affect privacy but it might be important to you.
ECONOMICS and SCALING
Both the Economics and Scaling sections cover the usability and long-term growth possibility of a coin. If you are interested in investing in a coin to make profit, you might want to look at the inflation rate, find out whether you can stake it, learn how miners make their rewards, or learn what the funding model is. Low transaction fees and high scalability are important for mass adoption and make it likely for coins to move from the stage of limited awareness, where only crypto-enthusiasts know about them, to the stage of practicality where individuals and businesses use them to address their unique financial needs. Navcoin and PIVX are noteworthy in that they lead the pack in transaction speed. Bitcoin, on the other hand, is slower and highly unscalable with 7.73 transactions per second, compared to Navcoin's 309 transactions per second. One can also remember the climbing of Bitcoin's fees to extraordinary heights in late 2017, where transactions could take hours or even until the next day for them to be fully confirmed. This is something I often bring up because it is important to remember what happened when adoption began to occur. Development is likely to resolve these issues in the long-run but they directly impact whether a coin will only ever be more than a theoretical promise.
SECURITY
When it comes to privacy, security is key. There is no explicit category in the Privacy Coin Matrix that covers this but different variables affect it. Security is not only affected by code implementation alone, but also by a malicious party's ability to control the network through hash power or coin weight, for example. Cryptography and code development can be tricky to implement with new technologies. Some projects run code audits which help, testing the networks ability to withstand various technical attacks. Privacy coins such as Monero, Zcoin, Zcash, Grin, Beam, Peercoin, Particl, and many others, are pioneering in that they are the first to implement certain coin features. They have active research being done or implement cryptographic concepts in a new way. Others coins have cryptographers rebrand existing code, and focus more on marketing than development. You may or may not think it is better to use a coin whose team can respond quickly and efficiently to any issues that arise because they did the background development, research, and implementation themselves. All the categories in the Matrix give some information on the overall security of a project, one specific section being Development. But to expect that bugs are never found and/or exploited may be holding coins to an impossible standard, when the technologies are so new and in ongoing development. They must also be framed against the existing technology that we use. There are a plethora of data breaches that occur with large financial companies that process and share their consumers' financial data.
COMMUNITY
This section is particularly important for coins that use privacy features that combine transaction information from other users to obscure information, such as CoinJoin and Ring-CT. The size of a community affects the volume of information that can be used to provide privacy on the network, even the available transactions for mixing are cumulative. The social community is correlated with, but necessarily the same as, the actual volume of trading or transactions on the network. Something that is not included in the Privacy Coin Matrix that is related to community is marketing. Even though the point of the Privacy Coin Matrix is to cut through that kind of noise, this is an important metric when considering that brand awareness and loyalty can impact privacy features and long-term prospects of a project.
COMPARING COINS
Considering these features altogether allows you to compare in a more greyscale or precise manner how coins compare against each other. Maybe you are looking to transact using a coin with the fastest transaction speeds, the highest privacy levels, privacy on by default, or with the community you like the most. You might like a coin for a very specific purpose, depending on what matters to you. For example, I like that Particl is focused on building a privacy ecosystem on the Bitcoin codebase instead of only a currency, but for instant practical purposes it doesn't have the volume like Monero. I also like that Monero was the pioneer of RINGCT in its original form, that Zcoin implemented the zerocoin protocol, and that Zcash implemented zk-snarks. I am generally a fan of any teams that come up with original technology or implementation, rather than simply copy and paste code then market. This excludes most privacy coins, which I won't name in this section, that simply rebrand existing code from firstcomers. This can come into play when bugs are found, so that coins do not simply wait for code to be rewritten but can respond immediately. But in the end, if something works it works, and new technology tends to build on older technology. As another example of how subjective comparison is, you might prefer proof of work over proof of stake. You could be interested in scaling solutions, or you might prefer a specific kind of privacy protocol. There are many competing factors and my own analysis, which comes in Part 3, will be based on what I consider important. Your own personal rubric will be what matters.
As history tells us, bloody family feuds can arise under the same roof. It's a big world and users have different needs and preferences. It is entirely possible for most of the competing privacy coins today to be successful when general crypto adoption occurs, with proper product differentiation done by savvy teams. Before moving on to my opinions, I would like to highlight the crux of this lengthy collection of information on privacy coins: the truth is that it is up to YOU to decide which privacy coin is the ‘best’. The best privacy coin is dependent on your needs and preferences, your loyalties, your values and your desires. See you in Part 3.
Video version here
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