Privacy coins have nowhere to hide! Chainalysis' analysis software will now support Dash and Zcash.

Chainalysis, a company specializing in on-chain data analysis, announced that it will support tracking and monitoring of privacy-focused cryptocurrencies Dash and Zcash. Despite being known for their privacy features, can these cryptocurrencies still be traced? Chainalysis believes that there is a common misconception about the privacy capabilities of these privacy-focused cryptocurrencies and explains how users typically utilize these features in their transactions.

Chainalysis announced yesterday on their Blog that their data analysis software, Chainalysis Reactor, and KYT (Know Your Transaction) will now support Dash and Zcash. This means that users or businesses who purchase their analysis services will be able to conduct audits on these two cryptocurrencies with a combined daily transaction volume of $1.5 billion.

What are the differences between the anonymity features of Dash and Zcash?

Many believe that Bitcoin transactions are anonymous, but Chainalysis points out that this is a misconception. Bitcoin transactions, addresses, and balances are all recorded on a public distributed ledger. The purpose of privacy coins is to make the data on the ledger more concealed. Currently, both Dash and Zcash have implemented specific privacy features.

Dash's PrivateSend feature is an optional built-in mixer that can hide the original address without a fee. The principle is to consolidate multiple transactions into one large transaction, redistribute transaction output addresses through the mixer, thereby increasing the difficulty of tracing back to the original address.

Zcash, on the other hand, utilizes zero-knowledge proof (zk-SNARK) technology to provide similarly optional shielded pools for anonymous transactions. Data before entering the shielded pool is publicly transparent, but addresses and balances are encrypted.

Similar to Dash's PrivateSend, users must actively choose to use Zcash's shielded pool. By default, transactions do not take place in the shielded pool and are public and unencrypted data, similar to Bitcoin.

What is zero-knowledge proof?: Imagine having a safe in front of you. How can you prove that you know the code to the safe without telling anyone the numbers? The simplest way is to open the safe in front of others, proving that you know the code without revealing any information. The essence of zero-knowledge proof is that the Prover does not need to disclose the message to the Verifier, yet the Verifier can determine if the Prover truly holds certain information.

Almost no users opt for anonymous transaction features

As mentioned above, the anonymity features of Dash and Zcash are optional. According to Chainalysis, transactions using mixers account for only 9% of Dash's total transaction volume, with actual fund transfers using PrivateSend being less than 0.7%.

Additionally, researchers from Princeton University have indicated that in some cases, it is possible to identify the outputs of PrivateSend coming from specific addresses. Chainalysis points out:

While PrivateSend does increase privacy for users, it can still be successfully audited.

Zcash has 14% of transactions opting for shielded pools, but only 0.9% of Zcash transactions are in a fully encrypted state. Chainalysis emphasizes:

Compared to Dash's mixer transactions, Zcash's shielded pools provide stronger privacy. Zero-knowledge proof makes our audits of Zcash more confusing, but most Zcash users do not use privacy features. We can still identify transaction amounts for over 99% of activities and at least one of the addresses involved.

The data above indicates that the majority of Dash and ZCash transactions are not for privacy purposes. Previous research also suggests that less than 0.2% of transactions from encrypted cryptocurrency addresses mentioned on the dark web come from Dash or ZCash.

Nevertheless, Dash and ZCash can still provide a higher level of anonymous transactions. Therefore, Chainalysis includes these two privacy coins in its data monitoring products to ensure that users and businesses using privacy coins do so for legitimate and compliant purposes.