It would seem that decentralization and anonymity go hand in hand. But they don’t! Some people will probably be surprised, but many transactions can be tracked on the blockchain. Even the most heavily encrypted cryptocurrencies, such as Monero, DASH, and Verge, can be tracked to a certain extent. This is due to the very nature of blockchain. Every transaction is recorded and stored in a ledger available to all.
Surprised? Probably, that’s the reason some people in crypto are so paranoid.
To start with, it is worth separating two essential concepts. Anonymity means that the name of the actor is unknown. But his actions are known. And confidentiality is the ability of a person or group to isolate themselves or information about themselves. To make it even simpler, anonymity is hiding the “who,” and privacy is hiding the “what.”
In the blockchain, anonymity means that parties can exchange data without revealing anything about their identity offline. For example, each Bitcoin owner’s address is a public key hash; it is not private because you can see all transactions made from and to that address.
The brand new newsletter with insights, market analysis and daily opportunities.
Let’s grow together!
When a BTC transaction takes place, all of its data, including its source address, is permanently stored in a public registry. And anyone can see the balance and transaction history of any Bitcoin address. This data remains anonymous as long as the address is not associated with a physical identity.
However, this can be difficult to achieve. The connection can appear when you register with an exchange that implements KYC or Know Your Customer procedures (all financial institutions, including cryptocurrency exchanges, are required to identify and verify the identity of each client). Or when you post an address on a personal blog to get donations.
You can generate a new address and use it for an anonymous transaction. But in fact, if someone really wants it, the identity of the owner of the address can be established. To create a new address for a transaction, you must first top up the address from which you want to make the payment. In the end, that’s how you can trace the information you wish to. All you need is the desire and time.
Bitcoin is a regular P2P (peer-to-peer is a decentralized communications model in which each party has the same capabilities and either party can initiate a communication session), so users can be attacked even at the network level. Anyone between the user and the Bitcoin network (such as an Internet Service Provider) can easily reveal the IP address. Also, authorities can demand access to this information.
According to MIT Technology Review, leaked information during purchases makes it easy to link people to their Bitcoin transactions, even when shoppers use additional privacy protections such as CoinJoin.
The danger is posed by web trackers and cookies — small pieces of code embedded in websites that send third parties information about how a user uses the site. Common web trackers send data to Google, Facebook, and other companies to track page usage statistics, the amount spent on purchases, browsing habits and interests, and so on. Some trackers even send companies personal information such as name, address, and email. And once the information about the transaction gets on the Internet, intruders can easily obtain it. And use it against you.
“If the victim employs 3 rounds of CoinJoin and the adversary observes two of the victim’s payments, he can link them back to her wallet (despite mixing) with 98% accuracy,” Steven Goldfeder at Princeton University says.
Hello, fellow crypto enthusiasts! 👋 As we embark on another week in the ever-evolving crypto…
EigenLayer, a protocol for Ethereum restaking, recently announced an airdrop plan that garnered both praise…
Keonne Rodriguez, a figure linked to the cryptocurrency mixing service Samourai Wallet, has entered a…
The debut of spot crypto exchange-traded funds (ETFs) on the Hong Kong stock market is…
Tether, renowned for its dominant stablecoin USDT, has embarked on a significant investment journey after…
Bitcoin analyst Willy Woo forecasts that the cryptocurrency industry could achieve its first billion users…