Are Your Blockchain Transactions Truly Anonymous?

By R.R. Hauxley

Anonymity and privacy = basic human needs. The dawn of blockchain technology was praised by freedom advocates as a leap forward in digital privacy and internet anonymity. Unfortunately, the brick wall of blockchain privacy has turned out to be a mere silk curtain — somewhat easy to peak through. For people transacting on the Bitcoin blockchain, it may come as a surprise that their transactions are, in fact, not anonymous. Fear not, however, as there are workarounds, solutions, and options.

Basic Blockchain Structure.

To understand the level of anonymity afforded by blockchain transactions, we must first understand basic blockchain technology. If you’re unfamiliar with the technology, consider glancing at this Introduction to Blockchain by Cryptomaniaks.

A blockchain is, as you may guess, a chain of blocks. Each of these blocks contains transaction information: which address sent how much bitcoin to which other address. These transactions are collected until a block fills up. The block is then full, done, complete and stamped into the blockchain.

This blockchain is essentially a giant public ledger. Think of it as a book. A book of all the transactions that ever happened. Each one meticulously written down for all to see and check, forever. This book is then copied and updated by hundreds of thousands of computers around the world. That way if anyone tries to cheat, by say erasing a transaction or making their wallet fatter, then all the copies around the world will say: “no that’s not correct,” and reject the cheater.

The virtue of the blockchain being a giant public ledger kept updated by people all around the world gives it security. In an age of digital piracy, this solution is genius.

Pseudonymous, What it Boils Down to.

Nevertheless, for all Bitcoin’s abilities, when it comes to anonymity, its greatest strength is at the same time … its greatest weakness. The Bitcoin blockchain is a public ledger, keyword public.

When you transact bitcoin, your wallet address and transaction details are recorded in the blockchain. As long as there is no link between your wallet address and your identity, your transaction stays anonymous. But as soon as any link is established between your Bitcoin address and who you are — whether it be your IP, your email, anything identifiable — then your cover is blown. Why? Because from that point on, a clever tracker can link your address with all the transactions you’ve ever made on the blockchain.

This is the reason Bitcoin is Pseudonymous. It cannot give true anonymity. Steven Goldfeder at Princeton University explains quite simply that “the way information leaks during ordinary purchases makes it straightforward to link individuals with the Bitcoin transactions they make, even when purchasers use additional privacy protections.”

Think of it, once again, as a book. At first, you write down “X address sends Y bitcoin to Z address.” No problem. No one knows who X and Z are. This information is recorded in the book forever. You keep on making transactions. Then one day a little information is leaked out. X address belongs to IP 192.168.0.etc. Who uses this IP? Oh, it’s John Smith. Therefore John Smith is probably the owner of bitcoin address X. And now we look at the blockchain and we follow the money. As we follow the money we see all the transactions John Smith ever made. Let’s hope none of them were dubious…

Anonymous, How to Achieve it.

Fear not, true anonymity is not impossible. However, it is just as much about the technology as it is about the user. If you wish to use bitcoin and keep your privacy, you must Use certain technologies.

VPN’s. Virtual Private Networks. Using a VPN service is like using someone else’s internet connection. Companies that run VPN’s house massive servers accept your internet connection and then route it through their IP. This way you hide behind their connection.
Use a new Bitcoin address for each transaction. This helps a little. It muddies the waters for people trying to trace the flow of your money. Caution must be used so as not to forget or lose track of the addresses and info you’re using.
Tumblers and mixers. A similar concept to using a new address. Using a tumbling/mixing service means that your money is first sent to be mixed with thousands of other addresses. It then emerges from a completely different address and goes to your destination. The service is quite easy with sites like bestmixer.io.
Coinjoin. Once again a similar concept to the ones above. Your money is joined into a pool of other people’s money. The address it comes out from is the address of a very large pool of people. Who can say who made the payment?
These are a handful of methods in place to ensure privacy when transacting on the Bitcoin blockchain. Nevertheless, they are not perfect and do require a bit of knowledge to use.

The Future of Privacy and Anonymous Cryptocurrencies

Fortunately for those who are not technically inclined or those who’d rather not jump through hoops — alternative cryptocurrencies focused on privacy exist. A few that spring to mind are Monero, Zcash, and Beam.

Monero. This cryptocurrency cooks anonymous techniques straight into its pie. You keep your address but when you transact Monero actually uses a different secret address each time. This means a transaction explorer or tracker will not be able to track the transactions.
Zcash. This cryptocurrency uses special encryption techniques to hide almost everything: the address, the amount, and other such details. They use techniques like zK-snarks and other fascinating cryptography to make the magic happen.
BEAM. This cryptocurrency is the new kid on the block. It uses a technology called Mimblewimble — its name being based on a spell from Harry Potter that tongue ties the opponent. The tech is not for the faint of heart, but suffice it to say that it approaches anonymity from a whole new direction — and succeeds.
There are of course several more cryptocurrencies that focus on delivering privacy. By using them and perhaps a little precaution, anyone can achieve the anonymity.

Conclusion

Privacy is a basic human right. Anonymity is how to get there. Nevertheless, getting there in this digital day and age requires effort. Websites are all too eager to share your information. Myriad cryptocurrencies are only pseudonymous. If you value your privacy and wish to remain anonymous, it will take effort. The payout, however, is well worth it. Remaining anonymous prevents identity theft, misuses of ones spending habits, and is generally a smart thing to do. Make informed decisions. Stay safe online.

R.R. Hauxley traveled around the world … on 1 Bitcoin. Along with his travels, he had the opportunity to interview many important players of the crypto space, including Charlie Lee and Vitalik Buterin. Nowadays, Rafael spends time helping newcomers to the industry by writing educational, simple and opinionated content for CryptoManiaks.com.

If you would like to have your company featured in the Irish Tech News Business Showcase, get in contact with us at Simon@IrishTechNews.ie or on Twitter: @SimonCocking