Why Privacy Coins Have Not Taken Off Yet? Analysis of Four Major Reasons!

Privacy coins are always a topic of discussion in the annual blockchain development. They are talked about optimistically every year, but their performance has not been impressive. Recently, Haseeb Qureshi, a partner at Dragonfly Capital, shared four reasons why privacy coins have not taken off yet. The following is the translation. For any uncertainties, please refer to the original article.

Why Haven't Privacy Coins Taken Off Yet?

The Cypherpunk Manifesto begins with the statement: "Privacy in an open society requires anonymous transaction systems." However, privacy coins ─ cryptocurrencies with strong privacy features ─ have yet to gain significant traction. The current values of Monero (XMR) and Zcash (ZEC) are lower than their values in 2018. In contrast, ETH's value is more than double its 2018 peak.

Aside from price, adoption has not improved much either. While one might expect privacy coins to be widely adopted in flourishing dark web markets, Bitcoin (BTC) remains the preferred asset there.

Less than 10% of existing Zcash tokens are shielded or private. Compared to smart contract platforms, the overall growth of users and transactions is rather lackluster. Privacy coins have been disappointing; why have they not taken off?

Four Major Reasons

1. Few Want to Transact Using Privacy Coins

While people may desire their money to be private, they do not necessarily want to use privacy coins for transactions. When most think of "privacy cryptocurrencies," they may think of privacy Bitcoin or ETH, or privacy stablecoins. Few would want to settle debts using such specialized cryptocurrencies, especially when their sole feature is privacy.

This is why Ethereum-based privacy systems like Tornado Cash have seen high usage rates in comparison. Tornado brings privacy to where people actually are ─ on smart contract chains, allowing them to use common cryptocurrencies like ETH, USDC, or DAI in practice. In contrast, the wallet, withdrawals, and liquidity of Monero have all provided subpar user experiences, leading to most users abandoning them.

Additionally, Tornado Cash internalizes the privacy cost to users who truly care about it, rather than forcing everyone to bear the privacy cost. This is a second reason for its success.

2. Privacy Is Not Easy

HTTPS is the encryption protocol used to access nearly all websites today, and its history tells us that people only choose privacy when it's easy.

Early website connections were often plain text. Initially, HTTPS was used only for websites handling credit card or banking data, as it was slow and cumbersome. HTTPS only became the default setting once the computational cost became cheap enough for websites to enforce it on users without their notice. Similar shifts have occurred in messaging services, with the largest end-to-end encryption service, WhatsApp, quietly enabling E2E encryption in 2016 without consulting users.

These two changes likely had more impact on internet privacy than anything else, but users do not have to consciously make decisions to become more private in use. Compare this to the difficulty of using Monero or Zcash for daily transactions, which require complex technology and impose very high friction costs to protect personal privacy.

3. Most People Do Not Care About Privacy

This unsettling truth lies behind the failure of privacy coins.

Let's look at the preferences people reveal. People use social media applications that openly sell their data to third parties; they use Venmo and publicly display their payment records to the world; they use SMS messaging, which is stored in plaintext and can be subpoenaed by law enforcement, while WhatsApp, Signal, and Telegram are free and freely usable.

It's easy to attribute this situation to a lack of consumer awareness, but the reality is different. Despite a series of major scandals, from the Cambridge Analytica scandal to last year's Twitter hacker incident, the use of social media has never been higher.

Privacy is a public good. In a free market, public goods are always in short supply, an economic law. If only a few users use privacy-protecting technology, the use of these technologies will be stigmatized. Let's compare WhatsApp with Monero, one ubiquitous and normally used for end-to-end encryption, the other also with encryption features but tagged as suspicious by the public.

There are two potential types of people. The first type does not take privacy concerns seriously; they just want their neighbors, spouses, and friends not to know what they are doing. Hence, using blockchain like Bitcoin or Ethereum suffices, as their neighbors are not knowledgeable in this area and cannot track their actions.

The second type is privacy-conscious individuals who want strong privacy controls to resist complex third parties. If used properly, technologies like Monero can deter corporations, governments, and motivated attackers. However, all these come at a high cost.

Few are willing to pay significant costs for privacy like the second type of people above. Until privacy costs are significantly reduced, we should not expect to see transformations in the cryptocurrency field akin to the use of HTTPS.

4. To Survive a Bear Attack, You Don't Need to Run Faster Than the Bear — Just Faster Than the Person Behind You

Privacy coins have always been the primary target of regulatory investigations. When regulators are told to "do something, not just stand there," dark privacy coins are waiting to be hit. In terms of regulation, we have seen a significant delisting of privacy coins in countries like South Korea, Japan, UK, and US. These governments have been tightening the noose around privacy coins.

As the cryptocurrency industry grows, many retailers and institutions hold Bitcoin and ETH. However, few institutions are willing to defend privacy coins. Rather than letting the entire industry be tainted, many would rather sacrifice privacy coins.

When it comes to privacy-preserving technologies, I admire the bold work that Coin Center and the Electronic Frontier Foundation do to protect Americans' civil liberties. However, when it comes to privacy cryptocurrencies, they may be fighting a losing battle.

Until then, it is expected that regulators will continue to scapegoat privacy coins, affecting their acceptance and liquidity. If one were to place a bet, I anticipate a painless solution for privacy coins to be integrated with DeFi and stablecoins for significant growth to occur.