Oct 20, 2020
Bitcoin, the next generation of money, has been the major topic for many curious people. It is the technology for transferring, funding saving money. Cryptocurrencies offer various advantages more than conventional payment systems. It is the decentralized system for people who do not like the central system, and it is a peer-to-peer network to ensure the validation of the transaction. If you are on the same side with those people, then it is your currency. This new decade-aged currency loves stories about itself, and the community reacts to it with great pleasure. We have posted many intriguing and informational blogs. This one will be the next question-answering post.
New technologies bring new intriguing topics to discuss. As the new technologies emerge, they violate our privacy and anonymity to some extent. It becomes the main problem for people. Is Bitcoin or other cryptocurrencies anonymous enough as they claim? Do they violate our privacy? We will investigate the popular pseudonymous idea of Bitcoin.
Bitcoin is the leading cryptocurrency in the market. To possess bitcoin, you have to have a Bitcoin address consisting of private (secret) and public keys. The private key is kept secret by you. Our main topic is the public key. When someone wants to send you a coin, then they address those coins to your public key. When you want to transfer money, then you use your public key. Since Bitcoin is a public ledger, then anyone can look at the transaction and make guesses about transactions. It is too hard to guess the people behind those transactions by just looking at them. This process is called pseudonymous. Anyone can see the transaction data, who paid to whom, but they cannot ponder who those people are. So, if the adversary cannot know who paid whom, why to bother about anonymity issue? Now let’s talk about the violation of anonymity.
According to Wikipedia, anonymity describes situations where the acting person’s identity is unknown. Some people think it as being without a name, but it does not capture the whole picture. The crucial thing is that person must be untraceable, non-identifiable, or unreachable. Here we will examine those features.
Let’s begin with a simple example. Nowadays, the vendors offering bitcoin as payment mean increases. Imagine you want to buy a drink with your bitcoins from the bar. Depending on the vendor, but mainly you screen the QR code for your payment with your phone. So, you just made your first un-anonymous transaction! Barmen knows you and your public key. If he/she is curious about you, they can search your address in the ledger to see your payment history. Just as simple as that.
Adversaries can link your identity with the help of a pseudonymous transaction you had. If we move on with the previous example, that barista becomes curious about you and begins to investigate. So, while searching in the transaction history, he comes across with transaction that has different inputs and one output. As we have learned from previous posts, you can use more than one key for both input and output sections. For example, you have seven bitcoins in A address, four bitcoins in B address, and five bitcoins in C address, and you want to buy a jacket for yourself for eleven bitcoins. So, you write both of your A and B addresses on the input side to merge them. You pay for the jacket, and your transaction is now on the ledger. So, you exposed your additional key to the barista. The second address can indeed be not yours, but usually, people do merge their addresses in one transaction. In the end, you lose your anonymity once again.
The another but similar way is losing anonymity in the output side. We left with five bitcoins in C address, a hot cup of coffee, and a jacket. If you order a jacket and a hot cup of coffee, then it means that the cold season comes. However, with your next transaction, it will be much colder for you. Let’s assume that you wanted to buy a scarf. The price of the scarf is 3.5 bitcoins. As we know from previous posts, if you pay for something, then you have to use all of your coins to finance that transaction. The reason for this is simplifying the search in the blockchain. There is no need to go years earlier to find out that you have sufficient funds. So, you pay for the scarf using your C address, and you sent the remainder of 1.5 bitcoins to your other address. That new address of yours will be the next exposed address for the barista. With all those examples, we tried to show that your anonymity is just pseudo.
Firstly, while payment, you can use browsers such as TOR to keep your IP address anonymous. Because when you send the transaction to the nodes, you leave a trail to your address. If that node is malicious, then they can find your identity possibly. Secondly, the anonymity issue has some solutions for users. There are mainly two options using wallets and mixing. They have similar methods to lose the tracks behind you. If you want to hide from the barista for your next transactions, you should use some intermediary. Firstly, have an intuition about the process. You put your money to the intermediary just like everybody else. This intermediary treats them as the same, so in the end, when you withdraw your money from the intermediary, the barista will not know which transaction is your transaction. Finally, you get rid of your stalker. Here is the intermediary is an online wallet or mixing service. What are the differences between them?
An online wallet offers you anonymity to some extent. There was weird news that Satoshi is one of the founders of the Silk Road (an online black market sells drugs and other things). People who found this they thought that Satoshi sent 1000 bitcoin to the Silk Road. However, in reality, they did not take into account the online wallet that serves as a mixing tool. So, we can think of an online wallet as an anonymity tool. How can you use online wallets? To use an online wallet, you have to present your identity information to the provider to possess a wallet. Wallet providers promise you that they will protect your privacy. They probably have all the transaction history of yours. This process cannot be convincing for some people. If the server of the online wallet gets hacked, then it means that they will have all information about the users. This lack of trust can make you doubtful about anonymity.
Mixing service gives you similar advantages. Besides anonymity, they offer not to hold your history, and they do not need an identity. Also, you can do more than one mixing. Since this is a business, they need to get paid. They hold some of your money during the process, which is predetermined by them. There are many mixing services and which one to trust is the main subject. You can use the most famous one, or you can use trial and error. There are also decentralized mixing services which are suitable for the ideology of the Satoshi.
In this blog, we learned about what anonymity is, how to avoid being tracked. While using bitcoin for payment purposes, you must be careful. We pointed out some solutions for that problem, and it is solely your choice to use them or not. At the conclusion, although bitcoin gives much more anonymity than real money, it does not mean that we are protected fully.