Bitcoin was created in the aftermath of the 2008 global meltdown and was an indirect (or direct) response to the instability of fractional-reserve banking. Its underlying network used cryptography to offer three primary functions:
Only a Bitcoin wallet owner possesses the authority to spend the funds in it.
The public address cannot be traced back to the private address.
Store transaction information via cryptographic hashing in a Merkle tree structure for data integrity.
However, as time went by, the privacy feature of Bitcoin was found to be broken - as seen in the Silk Road disaster. Transaction information on a public network, including Bitcoin, is visible to everyone. One can use this data to track the facilitator of the transaction. In addition to chain analysis, some platforms specialize in tracking crypto transactions.
It raised fear of possible financial censorship because the origination point could be traced on a public blockchain. The lack of privacy led the developer community to experiment with blockchain technology and find solutions to anonymize cryptocurrency transactions. Thus, various privacy protocols and coins were developed.
A Brief History of Privacy Protocols and The Emergence of Privacy Coins
Today, multiple private cryptocurrencies or blockchain networks exist. But, their origin dates back to 2012 when Nicolas van Saberhagen published the first version of CryptoNote that would make it impossible to determine the identity of a user. The concept uses ring signatures and stealth addresses and mixes each transaction with many decoys (aka mixins) to improve the privacy of open blockchain networks. Nicolas published an improved second version that added transactional scripts to the original CryptoNote protocol about a year later. Dubbed as one of the first privacy coins, Monero was the first popular network to implement CryptoNote to facilitate private transactions.
During the same time when CryptoNote's V2 was about to launch, Gregory Maxwell proposed a solution on Bitcointalk Forum to improve the privacy of Bitcoin users through a transaction style called CoinJoin. The protocol would allow users to couple their transactions with other users' transactions, making the whole transactional data indistinguishable. The idea was to bring more anonymity to Bitcoin transactions. However, it would still require a third party to combine the transactional data. Later on, in 2014, this concept was implemented by Dash to build a payment network that scrambled transactions to bring privacy to their blockchain.
In another part of the world, John Hopkins and his students were developing an idea that would fulfil the requirement of a third party to do CoinJoin. In 2013, they introduced Zerocoin to the community, allowing an intelligent contract to destroy and remake a coin to erase its history. This coin used zero-knowledge cryptography and zero-knowledge proofs to make transactions private. However, the Bitcoin community rejected the idea, which led to the creation of Zerocash.
While it is difficult to find out which network came first, Monero and Dash are considered the first few private cryptocurrencies that laid down the foundation for the existing privacy-preserving networks. But, despite offering privacy to the cryptocurrency users, none of them is as popular as Bitcoin - or even Ethereum. Why?
Because Regulators Cast a Gimlet Eye on Privacy Coins
Blockchains run on the idea of decentralization and can run on their own, but a little support from regulators can help reach technology to its maximum potential. Unlike public cryptocurrencies, private networks or privacy coins draw a much higher level of scrutiny from lawmakers. A primary reason is that they make crypto transactions untraceable, making them an ideal option for criminals. It is difficult to justify their illegal usage as Bitcoin is still the most loved cryptocurrency for illicit activities. However, the ability to make transactions anonymous and indistinguishable automatically puts privacy coins under scrutiny. Irrespective of the reasons, regulators around the world are dialing up the heat against private blockchain networks.
Privateum Solution - A Cooperative Business Model For Cryptocurrencies
As the world experiences a prominent movement in the financial industry, it is crucial to take the agreement of regulators while respecting and preserving the end-users privacy. A way to do this is by utilizing a cooperative model to build a blockchain-based private network.
Privateum members control and own the cooperative, who also use the cooperative's products and services. This business model creates wealth and reflects community interest while also providing limited liability, the potential for longevity, and governance. The model offers two advantages:
supports the development of local economies, businesses, participants, and communities
is versatile, for it captures both a multi-stakeholder global partnership or even a tiny shop.
Privateum cooperative business model provides a governance framework for all voices on the table to be heard equally.
Privateum cooperative model supports building a privacy-preserving custodial solution in cryptocurrency by connecting individuals, businesses, financial institutions, and other cooperatives under one legal umbrella.
Cooperative includes natural people, businesses, and legal entities from around the world. All of them are connected using a decentralized blockchain network.
A blockchain-based cryptocurrency system implemented via a cooperative model is an internal product that should be used internally. Therefore, no external regulations apply to such a technological system.
Each participant of a cooperative model can be KYC proxied via a licensed lawyer to protect them legally.
All cooperatives can manage public funds of a network to enhance an ecosystem and its participants, thereby working for social impact without any personal interest.
Such a model can impose restrictions on regulators and institutions to see only the overall balance of fiat money.
Cooperative divisions can be nominated in goods and services, fiats, or cryptocurrencies, which creates opportunities for internal growth that can further lead to new economic systems.
While these pointers do not cover the whole spectrum of what a cooperative model is capable of achieving in a blockchain-based network, it can certainly make up for a solution that protects the privacy and financial liberties of individuals while enabling lawmakers to have access to the necessary data.
The development of several privacy coins in the past decade has shown that building private blockchain networks is possible. The real challenge is making them look good in the eyes of lawmakers. Without regulatory support, cryptocurrencies, including private ones, can't reach the mainstream audience.
P.S. Privateum cooperative model -an ideal option as it assists regulate cryptocurrency payments while providing fundamental privacy rights to the users.