Are Blockchains Anonymous?
When people first hear about blockchain, it’s typically through some click bait-laden headline touting Bitcoin’s anonymous nature.
Its creator remains unknown, only going by the pseudonym Satoshi Nakamoto. It gained popularity as an ‘untraceable’ currency for illegal dark web purchases. And Bitcoin wallets aren’t associated with any personal information.
Even with all the media mystery shrouding the new technology, Bitcoin (and most blockchains for that matter) aren’t actually anonymous.
Blockchains Are Typically Pseudonymous
Similar to how authors will sometimes write under a pseudonym, you send and receive cryptocurrency using a pseudonym. Instead of a fictitious name, though, your blockchain pseudonym is your public address. This long string of numbers and letters doesn’t contain any identifiable information that would tie you to the address or its associated wallet.
Because the complicated addresses mask your identity, many people think that activity on a blockchain is anonymous. While public addresses protect your privacy to some extent, other blockchain features tend to expose you.
Blockchains Are Public Ledgers
You and anyone else can view the entire history of the transactions on a blockchain as well as the amount of cryptocurrency that each wallet holds. So, unless you create a new wallet after each transaction, your anonymous cover is blown.
Once someone has your public address, which they do after you transact with them, they can look up not only your previous activity but also anything you do moving forward. On top of that, that person can check your wallet balance anytime they please. It’s like giving the world access to your bank account statements.
First Bitcoin Wallet | Source: Blockchain.info
Law enforcement agencies around the world have utilized Bitcoin’s public ledger to track down criminals, money laundering operations, and drug rings.
The early days of blockchain may have enabled you to stay anonymous, but that’s no longer the case. U.S. Drug Enforcement Association (DEA) agent Lilita Infante goes so far as to tell Bloomberg, “I actually want them to keep using them [blockchains]” because “blockchain actually gives us a lot of tools to be able to identify people.”
Today’s sophisticated blockchain analysis software makes tracking wallets and tracing transactions as easy as the click of a mouse.
You’re More Than Just a Name
Even if you manage to bypass a blockchain’s public ledger, you’re not home free.
Beyond the standard personal info such as your name, address, or phone number, there are other, more digital, ways to identify you – namely, your IP address.
Without going into too much detail, a suspicious party could ‘intercept’ your transaction to figure out that your IP address is where it originated. They do so by connecting to all the nodes on the blockchain network. From there, they listen to see which node is the first to broadcast a transaction. That node is the transaction source (i.e., you).
Bitcoin developer Gavin Andresen notes, “Unless you are very careful in the way you use Bitcoin (and you have the technical know-how to use it with other anonymizing technologies like Tor or i2p), you should assume that a persistent, motivated attacker will be able to associate your IP address with your bitcoin transactions.”
How to Stay Anonymous on the Blockchain
Even though the anonymous blockchain rumor bubble has popped, there are a few different strategies to improve your anonymity.
Mixing/Tumbling
Coin mixing is a type of virtual money laundering. Mixers, also called tumblers, effectively mix your cryptocurrency with the cryptocurrency of others. You send your crypto to the mixing service, and they send back someone else’s coins. By going through the service, you dump off the coins that someone could trace back to you, and you receive ‘fresh’ ones.
The traditional finance equivalent of coin mixing is using an off-shore bank account in somewhere with bank secrecy laws, like the Cayman Islands.
Tor/Onion Routing
Onion routing obscures your IP address when online. By wrapping your messages in layers and layers of encryption, it enables you to communicate anonymously over a blockchain network.
Tor is free, open-source software that implements onion routing. Tor not only hides your IP address but also prevents website visit tracking and message recording among other things.
CoinJoin
CoinJoin is another solution to improve blockchain transactions’ privacy. The service simply combines the coins of multiple payments into one transaction. Then, it distributes funds from the transaction pool to the appropriate recipients.
The recipients still receive the crypto they’re supposed to, but the transactions are much more difficult to trace since they were joined together.
Privacy Coins Provide an Alternate Solution
Although you can couple third-party services like the ones above with pseudonymous blockchains to achieve a higher level of anonymity, a privacy-focused blockchain is usually a better choice. Once again, you can never be fully anonymous on a blockchain, but the following projects continuously work to bring you closer to real privacy.
Monero is the most popular and arguably most anonymous privacy coin. It implements ring signatures, stealth addresses, and ring confidential transactions (RingCT) to keep your transactions anonymous and untraceable. The Monero team has also added several network-level features such as I2P, a Tor alternative, to obscure your information even more.
Another popular privacy coin is Zcash. Unlike Monero, Zcash implements zero-knowledge succinct non-interactive argument of knowledge, or zk-SNARKs for short. This particular type of proof allows you to confirm an action (transaction) without the need to reveal the details of that action (sender, receiver, amount).
Zcash is also unique in that privacy is an optional feature when interacting with its blockchain. Some blockchain enthusiasts are critical of the Zcash feature because they feel as if it compromises the anonymity of the entire network.
Monero and Zcash aren’t the only two privacy coins – far from it. There are tens, possibly over a hundred different cryptocurrencies tackling anonymity in distinct ways. Dash, ZenCash, and Zcoin are a small sample of the many others to check out if you’re interested.
The Future of Anonymous Blockchains
As with anything in life, the addition of privacy to a blockchain comes with tradeoffs. Adding privacy measurements is complex and adds bloat to the blockchain. The throughput of most privacy coins can’t keep up with their non-anonymous counterparts.
We’re still in the (very) early days of anonymous blockchains, however. For instance, Monero recently implemented Bulletproofs, a type of zero-knowledge proof that decreased transaction sizes by 97 percent.
Although many public blockchains currently lack the functionality to keep your identity and transactions anonymous, that may not always be the case. Bitcoin and Litecoin developers are already working on solutions to add more anonymity to the two coins. With Bitcoin as the blockchain fountainhead, other cryptocurrencies will surely follow suit.
Looking for more information? Check out our 2018 Blockchain Security Threat Report.