[LongHash Column] Why do Dash and Zcash have less than 10% of transactions using privacy features?

Dash and Zcash both provide optional privacy features for users, but the actual percentage of transactions using these privacy features is less than 10%.

Original Title: "In-depth | Can Privacy Coins Dash and Zcash Really Protect Privacy?"
Written by: Chainalysis
Translated by: Liam

We have just launched support for the two cryptocurrencies Dash and Zcash in Chainalysis Reactor and KYT. As the two most popular "privacy coins" (cryptocurrencies with protocols that encode enhanced privacy features), they account for over $1.5 billion in daily reported transaction volume.

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You may wonder why Chainalysis products would support privacy coins. Isn't the whole point of privacy coins to make transactions untraceable?

This view is too simplistic as it misunderstands the privacy features provided by Dash and Zcash, and how users actually utilize these features in their daily transactions. Below, we will explore how Dash and Zcash enable investigators and regulatory experts to investigate illicit activities while balancing users' privacy needs and industry compliance requirements.

What makes privacy coins truly private?

Many believe that BTC transactions are private, but this is a misconception. Transaction information, addresses, and balances are all recorded on a public and permanent ledger. Chainalysis can analyze transactions and use open-source intelligence to link addresses to real-world entities for regulatory compliance purposes (note: we only identify services, not individual user wallets).

Generally, privacy coins have features designed to make the above process more challenging. This can be achieved by adding privacy features to existing blockchains, including BTC. However, privacy coins operate entirely on a new blockchain and have privacy features built into the protocol. Let's take a look at the specific privacy features implemented by Dash and Zcash below.

Dash was launched in 2014 as a fork of BTC, with its most significant privacy change being the introduction of the PrivateSend feature. PrivateSend is achieved through a coin mixing protocol, similar to what the Wasabi wallet for BTC or other coin mixers use, to obfuscate the origin of funds. However, it's important to note that PrivateSend is optional, and Dash does not use coin mixing technology by default.

The typical principle behind these anonymous transaction technologies is that multiple individuals send funds to a large transaction, and then each controls a new address that receives an equal amount of funds. This makes it challenging to link sending and receiving addresses.

Example of Dash's PrivateSend coin mixing feature: Eight inputs of 0.1 DASH each, eight outputs of 0.1 DASH each. Each input has a corresponding output.

For Dash's PrivateSend transactions, a user's funds are divided into standard denominations of 10, 1, 0.1, 0.01, or 0.001 DASH. These funds are then sent in the form of mixed transactions, with the transaction only containing a specific denomination (e.g., all inputs and outputs are 0.1 DASH as shown in the screenshot above). The user receives back the same amount of Dash, but the funds are mixed with those of other PrivateSend users. These mixed transactions can then be sent to another user using PrivateSend in the future.

Similar mixed transactions with functions like PrivateSend can be executed on other cryptocurrencies. This means that from a technical perspective, Dash's privacy features are not necessarily stronger than BTC's, hence the "privacy coin" label is a misnomer for Dash. In fact, some standalone wallet software offers more advanced forms of coin mixing that can be used alongside major cryptocurrencies not labeled as privacy coins, such as BTC, Bitcoin Cash, and Litecoin.

Unlike most BTC coin mixers, PrivateSend mixed transactions do not incur any fees. Therefore, while using Dash's PrivateSend for mixed transactions may not be more effective, it does make executing transactions cheaper and simpler for users.

Zcash, launched in 2016, is a privacy coin centered around cryptographic algorithms. It does not change transaction patterns to conceal user information but provides the possibility of encrypted blockchain activities through a process called shielding.

Zcash offers protection through shielded pools, a set of encrypted addresses where balances and transactions within the pool are always encrypted. Transactions entering and leaving the shielded pool, or transactions within the pool, are transparently visible, but the addresses of parties involved remain encrypted. However, similar to Dash's PrivateSend, users must opt to use Zcash's shielded pool to gain the encryption feature. By default, transactions do not occur in the shielded pool but are public and unencrypted, similar to BTC.

© 2016 Electric Coin Co.

So, if all this information about addresses and transactions is encrypted, and only the owners of these addresses can view their information, how does Zcash maintain a public ledger? How do people know if the encrypted addresses in a transaction block are valid and have received the funds sent?

Zcash employs a zero-knowledge proof system known as zk-SNARKs, which can provide a true or false answer to verification questions without sharing any details. This allows users to prove the presence of funds in their accounts to the network without revealing their balance.

zk-SNARKs enable transactions to be protected in public while ensuring only relevant parties have access to detailed information (the receiver may not even know the sender's address!). Transactions involving the shielded pool typically incur a fixed fee of 0.0001 ZEC to prevent pattern observation for inference.

As mentioned, the privacy features of Dash and Zcash are optional and can be chosen on a transaction-by-transaction basis. Therefore, the level of privacy protection for each currency can vary significantly based on real-world usage.

Mixed transactions related to PrivateSend account for around 9% of all Dash transactions. This is higher than the share of BTC transactions using mixing technologies, but this proportion is still relatively small and decreasing in Dash transactions.

Users are not required to use the outputs of these mixed transactions to conduct PrivateSend transactions. Instead, they can choose to combine them with non-mixed funds. This results in PrivateSend transactions for actual fund transfers in Dash accounting for less than 0.7%.

It is relatively easy to identify mixed transactions, including those involving PrivateSend, on the Dash blockchain. Because they remain publicly transparent, the methods used to analyze and identify mixed BTC transactions can similarly be applied to Dash.

Due to the need for a significant number of input transactions to break down funds into various denominations, some inputs and outputs can be linked in certain PrivateSend transactions. For example, a user sends 73.4 DASH and receives 14 inputs, which could be explained as receiving 7 inputs of 10 Dash, 3 inputs of 1 Dash, and 4 inputs of 0.1 Dash. Researchers from Princeton University have shown that in certain situations, combination symbols can be used to identify the individual address from which the PrivateSend output originated.

This means that while PrivateSend does increase privacy for its users, it is still subject to scrutiny.

Around 14% of Zcash transactions are in some way related to Zcash's two shielded pools. However, out of the transactions involving the shielded pools, only 6% are fully shielded, meaning the sender, recipient, and transaction amount are all encrypted. These transactions account for only 0.9% of all Zcash transaction volume.

Despite Zcash using zk-SNARK encryption to provide stronger obfuscation, Chainalysis can still derive transaction amounts and at least one transaction address from over 99% of Zcash activity.

In terms of balances, while a significant amount of ZEC passes through the shielded pools daily, only 5% of ZEC currently resides in the shielded pools. This situation is partly due to protocol requirements, where all mining rewards must first pass through a shielded pool before being transferred to a public address. This means that if you trace the origin of ZEC, it will always stem from a shielded pool. This intentional design ensures that all public ZEC transaction activity ultimately traces back to a shielded activity.

Compared to mixed transactions, shielded pools in Zcash can offer stronger privacy, but they are not impenetrable. Research from University College London indicates that the use of shielded pools can decrease anonymity through simple exploratory methods based on usage patterns. They found that most Zcash users do not even utilize Zcash's privacy features. The researchers also noted that among those transacting using shielded pools, the majority operate in a straightforward, easily identifiable manner, such as withdrawing the same amount of ZEC they just deposited in a short timeframe.

Dash and Zcash allow users to transact with higher privacy levels, but this does not equate to complete anonymity. The privacy features of both cryptocurrencies (including their development and real-world usage) provide room for investigators and professionals to investigate suspicious or illegal activities to ensure compliance. With the support of Chainalysis products, cryptocurrency businesses can now incorporate Dash and Zcash into their compliance programs.

The primary use cases for these currencies are not privacy-centric. A study conducted by RAND Corporation on cryptocurrency addresses involved in the dark web revealed that less than 0.2% were Dash or Zcash.

This article is reproduced with the permission of ChainNews, article source: ChainNews (ID: chainnewscom)