How privacy can be maintained in the cryptoverse.
Bitcoin and other cryptocurrencies had for a long time been considered a truly anonymous payment system. But this is not quite so. Payments are made to addresses which can be easily seen on the blockchain by anyone. If such an address has once been linked to a real person, they instantly lose their anonymity. That’s why nowadays many people think of Bitcoin as not an anonymous digital currency but rather a pseudonymous one.
Analyzing the blockchain along with applying KYC (Know Your Client) and AML (Anti Money Laundering) policies has helped police track down users of the Darknet markets.
Bitcoin’s creator, Satoshi Nakamoto, never considered Bitcoin anonymous and untraceable. In his Whitepaper he uses the term “anonymous” only in reference to public keys. He writes, in particular:
“Privacy can still be maintained by breaking the flow of information in another place: by keeping public keys anonymous”.
In other words, Bitcoin’s privacy is limited by the level of anonymity achievable by public keys which serve as an alias (pseudonym) for the end user. Pseudonymity and anonymity are related concepts, however, the difference between them is huge. Anonymity makes it impossible to reveal a real identity of a person or group of persons, while pseudonymity is more related to a fictitious name which someone uses instead of their real name.
Therefore, each public key becomes our personal pseudonym, and while we can try to hide behind it, the truth is that Bitcoin was not conceived with anonymity and privacy as its primary concerns.
It is not easy to hide behind a pseudonym.
The short history of Bitcoin has revealed enough examples exhibiting the drawbacks of using public keys and the hurdles that users encountered while trying to keep up their anonymity. The narrative behind Ross Ulbricht’s and Silk Road’s story is an excellent example of Bitcoin’s inadequate privacy.
Ross Ulbricht, known on the Web as Dread Pirate Roberts, founded the famous Darknet market where only Bitcoin payments had been accepted, thereby skipping traditional payment channels. These payments had been a dream thing for the unbanked users of Silk Road. Peer-to-peer aspect of cryptocurrencies matched perfectly the anarchic environment of the place. As a quirk of fate, it is Bitcoin and the blockchain exactly that had become the ultimate culprits in Ross Ulbricht’s capture and conviction.
The FBI used the Bitcoin blockchain to link transactions to servers taken over earlier. There were over 3500 entries in the public ledger made between the servers and Ulbricht’s personal notebook that the agency had laid their hands on.
In this case, the anonymity of Bitcoin ended when the FBI had successfully linked the open keys to a certain person. Ulbricht’s public keys were his pseudonyms, each of them being associated with a specific set of transactions. This happened in 2013, and since then the special services have improved dramatically the technologies of tracking down blockchain transactions. A short example to that tune is given in this article.
When both the Darknet merchants and anonymous hackers realized that Bitcoin didn’t offer any magic anonymity, many of them switched to using Monero as this currency was specifically designed to impede tracking down and provide a highest level of anonymity possible. Even so, one research group has recently discovered that while Monero is definitely better than Bitcoin, it is not a panacea either.
A team of researchers from the world's leading universities including Princeton University, Carnegie Mellon University, Boston University, Massachusetts Institute of Technology, and University of Illinois at Urbana-Champaign have released a study where they discuss the shortcomings of the mixing algorithm via which it is possible to trace single transactions. And the issue applies to anyone who ever used Monero in the past, not just the ones going to pay with it today as all payment details are permanently carved into the blockchain and easily available for analysis.
One of the study authors, Andrew Miller from the University of Illinois at Urbana-Champaign, says that people are eager to oversimply, and they expect Monero transactions to be guaranteed to remain private. In practice, though, there are still pieces of information which are not encrypted by the network. In this manner, Monero transactions remain potentially traceable, even though it is still a matter of probability rather than solid evidence.
For details see here.
How to maintain anonymity?
There are always enthusiastic people willing to take steps and turn the word ANONYMITY into a real thing. However, these efforts are most often backed up by entities affiliated with governments and special services.
For example, TOR is sponsored by the US government (which is openly stated on their site).
JohnDoe Browser is sponsored by Google which has always been faithful and loyal to special services without even hiding it.
There are many such projects, but it is almost always evident where everything comes from.
In my opinion, the future of anonymity and privacy belongs to projects which are financially backed up by simple users and not affiliated with any entity.
The author of this piece had a hard time to find such a project today. As a matter of fact, any project aiming at true anonymity won’t disclose its algorithms, team members and similar details, even though this will definitely raise legitimate concerns and suspicions in the community.
Presently, the most promising project aimed at offering anonymity in the Internet is Stealth Project.
This project consists of a novice decentralized network ecosystem employing the blockchain paradigm as well as results of modern research in the field of applied cryptography and privacy protection. The project is being developed according to the following milestones:
A multi-cryptocurrency wallet with strong emphasis on anonymity offering a built-in mixer
A self-sufficient anonymous and autonomous network infrastructure (similar to Tor but with its own system of independent servers which is times faster)
Creation of web content available only from within the Stealth Project network
Stealth Wallet is one of the most interesting aspects of the project. The project developers plan to introduce useful features like:
A built-in cryptocurrency mixer enjoying a sophisticated mixing algo;
Instant mixing with immediate coin transfers from different addresses;
Possibility of passive earning when participating in the mixing program;
Instant cryptocurrency exchange similar to ShapeShift but with added anonymity;
A system of exchange codes to support off-chain transfers of funds;
An under-the-gun protection mechanism including a feature which allows to sends the wallet balance to the system via a secret key combination (and claim the money back at short notice);
Cross-platform support and many other features.
The project has its own STELZ token which can be used as a means of payment for coin mixing. At the moment, the project’s ICO is live and running, and it will last till September, 1st. Considering the interest the project has raised as well as the fact that the project’s team are delivering on their promises so far (for example, they paid out the rewards to bounty hunters in full), it is quite possible that there will a reliable tool instrumental in achieving network anonymity by December.
It is not uncommon nowadays to hear the question why do we actually need anonymous cryptocurrencies? It involves concerns that we, as individuals, want to protect our personal data and privacy even though most of us have nothing to hide.
Privacy is a funny thing considering the fact that it is not always obvious why a law-abiding citizen and not a wrongdoer would ever need it. But for the society as a whole it is a very valuable asset, and that’s exactly the reason why its benefits are hard to notice on a personal level. It is helpful to draw an analogy here: any particular individual may not need a road over a thousand miles away but the society at large benefits greatly from a developed transport infrastructure.