Corporate Finance, DeFi, Blockchain, Web3 News
Corporate Finance, DeFi, Blockchain News

Anonymous transactions in Bitcoin

by Ilias Louis Hatzis.

Our theme for this week is “Anonymous transactions in Bitcoin“

Are transactions made through Bitcoin really anonymous?

When one person sends Bitcoin to another person, their identities are not needed to complete the transaction. They do not need to share with each other, their names, addresses or phone numbers.

It sounds pretty anonymous, right?

A cryptocurrency transaction has three parts: the sender’s address, the receiver’s address, and the amount being sent. For Bitcoin, all three are public. For any transaction, we can see address of the sender, receiver and value of the transaction. Now, since every Bitcoin transaction is recorded on Bitcoin’s public ledger, anyone can view any Bitcoin wallet and transaction.

Bitcoin is neither confidential or anonymous.

Bitcoin is pseudonymous, because each user has a public address that can be traced back to an IP address or exchange account.

There are many ways to link a wallet address, someone’s identity. Some people share their wallet address online. If an address is used on an exchange, that implements KYC (“Know Your Customer”), the address can be linked to a person’s real-world identity. Merchants you pay can make the connection.

As usage grows and more transactions are recorded on blockchain, a massive public map is being stored, which is accessible by anyone. With the right tools, transactions can be placed under a microscope to give us a very clear picture of how Bitcoins are moving. This poses a huge privacy concern.

Companies like Chainalysis and Elliptic have developed software to analyze blockchain transactions. To link transactions to real identities, they use online and public information. Chainalysis’s most famous work was helping the FBI identify two agents, that were stealing Bitcoins from the wallet of Silk Road, an online drug marketplace.

Blockchain analysis software, goes far beyond just catching criminals. As more investors enter the market, blockchain analysis software can help banks and other financial institutions comply with KYC/AML, or monitor market trends. Increased Bitcoin trading in countries around the world, could mean pressure on national fiat currencies. This kind of information could provide insights to investors, long before official statements are public.

While, Bitcoin does not offer anonymous transactions, concerns about privacy have increased and so have the prices for some cryptocurrencies that offer anonymous transactions. Monero started last year at $12, reaching $136 in August. Zcash in January was at $10, and in June it reached $376.

Currently, there are several efforts (TumbleBit, Chaumian CoinJoin and ZeroLink, Schnorr Signatures for CoinJoin, STONEWALL etc.) underway to increase Bitcoin’s privacy, the most prominent being “Confidential Transactions”.

Confidential Transactions (CT) provide a way to protect transaction values, so they are only visible to the people involved in the transaction. Everyone else only sees that Bitcoins are transacted, but not know how many. While, CT improves privacy by preventing others from viewing your account balance and transaction amounts, it not a silver bullet for privacy. Confidential Transactions masks amounts, but you can still see who is paying who.

Is it possible to be anonymous?

There are number services that let you buy Bitcoin with KYC.

BitQuick acts as an escrow for Bitcoin transactions via cash deposits at thousands of banks across the US. The seller deposits the Bitcoins at BitQuick. Once the buyer deposits the cash into the seller’s account the coins are released. A mobile phone number is needed for this process but no id verification is required. Unlike an photo ID a mobile phone number can be easily purchased with an anonymous email via Skype for example. You could also use Bisq to buy and sell Bitcoin, without AML/KYC. Bisq is a decentralized peer to peer Bitcoin exchange that lets you buy/sell Bitcoin with a variety of payment methods.

There are ways to stay anonymous. Bitcoin used together with the TOR network, allows anyone to pay anonymously for digital goods. In combination with Tor, anyone can get additional protection and encryption, using Tails, Bitcoin tumblers, and mixers. Also, technologies like Dark Wallet go even further. It uses a technique called CoinJoin: Every time a user spends Bitcoins, the transaction is combined with that of another user, chosen at random, who’s making a payment around the same time.

If I had to make some suggestions, here four rules of thumb:

1. Always try to use cash: If you’re want to buy and sell Bitcoins anonymously, the most private way would is in cash and in person. You can use services like LocalBitcoins to find someone who is willing to sell Bitcoins for cash close to your location. Another way to buy Bitcoins anonymously with cash, is to go to your nearest Bitcoin ATM and buy Bitcoins from the ATM using cash.

2. Never reuse Bitcoin addresses: Use a new Bitcoin address for every single payment you receive, and never send money twice to the same exact Bitcoin address. Re-using a Bitcoin address is a massive privacy and security risk. Fortunately, many of the newer wallets can generate an unlimited number of public addresses, from a single seed.

3. Never use SPV and hosted Wallets: Almost all SPV wallets (also known as thin clients) leak which addresses you own to whatever SPV server they connect to. SPV wallets do not store the blockchain locally. Instead, they query a single SPV server for the transactions that involve the addresses in your wallet. While this functionality is far more efficient and fast than parsing the blockchain locally, the trade-off is that every Bitcoin address you own is submitted to the SPV server.

4. Use an anonymity network or VPN like Torguard: Always connect to the internet through a privacy network like those listed above or a VPN and use a privacy optimized version of Firefox, or the Tor browser.

Lack of privacy is a problem. Bitcoin anonymity is an uphill battle. All transactions are permanently etched in a transparent ledger. Being anonymous requires expertise and effort. For most users hiding their financial records from the government, will be impossible, but the vast majority of users might not necessarily want the world to know where they spend their money, what they earn or how much they own. For now its our responsibility to adopt good practices in order to protect our privacy.

Ilias Louis Hatzis
Ilias Louis Hatzis
Ilias Louis Hatzis is the Founder & CEO at Mercato Blockchain Corporation AG.
He writes the Blockchain Weekly Front Page each Monday.

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Mercredi 23 Janvier 2019

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