Maintaining your privacy and security online is more vital than ever in our increasingly online world.

One of the key tools used by internet users to protect their privacy are Virtual Private Networks, or VPNs.

They are commonly used by those in the crypto space to enhance their privacy while transacting in cryptocurrency—but they’re also used to skirt local laws, particularly geographic restrictions on crypto and decentralized finance (DeFi) tools.

What are VPNs?

A Virtual Private Network is a service that creates a secure and encrypted connection over a less secure network, aka your internet connection.

If the internet were a series of highways and roads, not using a VPN would be like driving down the highway—everyone can see your license plate, what you’re driving, etc. When using a VPN, it’s like taking a dirt road that shields you from the gaze of other drivers.

When you connect to the Internet via a VPN, you’re routed through a remote server operated by the VPN provider. The server basically acts as an intermediary between your computer and the Internet.

The server masks your IP address and displays another one in its place. Many VPNs even let you choose which country users want their fake IP address to be located in!

How do VPNs work?

VPNs create a secure and encrypted connection between your computer and the internet by using three core processes: encryption, tunneling, and IP masking.

VPNs encrypt data before it leaves your device. “Encrypting” your data just means that it takes your data and makes it more difficult for would-be hackers or bad actors to interpret it. Your data is scrambled using a unique key, and only someone with that unique key can unscramble it.

Another process used within VPNs to keep your data secure is tunneling. Going back to our previous example of a system of highways, tunneling is the act of taking a private road. By taking a private road, your information is protected from other drivers and potential bad actors.

Finally, VPNs employ IP masking. IP masking involves hiding the user’s IP address and replacing it with another fake IP address. This can be located in another country, which is commonly used to circumvent geoblocking restrictions on content and services.

Why hide your IP address?

Your IP address reveals a surprising amount of information about both you and your online activity.

From looking at your IP address, someone can learn your physical location, what internet provider you use, and track your online activity (what sites you visit, how long you stay there, and what actions you take). This information is often used by advertisers to provide targeted ads, which some internet users object to.

A VPN can also be used to protect users against a number of forms of cyberattack, such as Distributed Denial of Service (DDoS) attacks and man-in-the-middle attacks.

Benefits of using a VPN

The main benefit of VPNs is the increased privacy they provide. It doesn’t matter whether or not you’re doing anything that needs to be hidden—privacy is a basic human right that all should be entitled to.

Using VPNs helps you control your online presence and, more importantly, your data. If you’ve ever thought it was creepy that social media platforms seem to know exactly what products you’re considering buying, a VPN would stop that from happening.

VPNs also make it more difficult for hackers to attack your device or monitor your online activity. Therefore, it’s generally a good idea to use a VPN anytime you’re using public WiFi, which is notoriously insecure.

Who uses VPNs?

VPNs were originally created to help remote workers connect to private corporate networks securely.

Since their humble beginnings, VPNs have expanded to cater more to the general public. Now, many consumers use VPNs to enhance their privacy or access content that’s been geolocked by its creator or blocked by the country they reside in.

This can range from users watching TV shows on their home country’s streaming services when on holiday, to citizens of oppressive regimes accessing news from outside sources.

Some crypto users make use of VPNs to circumvent local restrictions on crypto exchanges and DeFi protocols in their region—much to the chagrin of regulators.

While this is certainly possible, it could also fall foul of local laws—and many crypto platforms have closed this loophole by requiring users to sign up using know-your-customer (KYC) identification.

What are decentralized VPNs?

For those wanting to take their privacy a step further, there are also decentralized VPNs to consider.

Centralized VPNs are managed by a single entity—the organization selling the product. This entity is responsible for managing the infrastructure necessary to run the VPN network (the nodes) and securely managing users' data. With centralized VPNs, users must trust the VPN provider to handle their data securely.

Decentralized VPNs operate without a single point of authority and instead rely on a network of nodes run by users of the network itself.

Because they are run by a network of users and not a single entity, user data is distributed across many nodes and, as a result, becomes harder to track.

Being decentralized also makes them more censorship-resistant—as shutting down any one node in the network doesn’t shut down the network as a whole.

That being said, decentralized networks do have disadvantages. They tend to be less user-friendly and more complex to set up. The performance of the VPN will also vary depending on the quality of the specific node a user ends up connecting to. Some examples of decentralized VPNs include Hopr Network, Deeper Network, and Orchid.