Contrary to popular opinion that bitcoin is anonymous, it is safe to proclaim that it is entirely not. Instead, the right question to ask is, “To what extent is bitcoin anonymous?”
Fundamentals of Bitcoin Anonymity
As suggested earlier, bitcoin is not anonymous. Rather, it is thought to be pseudonymous because some components of Bitcoin – which includes private and public keys, addresses, and transactions – are all embedded in text strings, that are in no way directly linked to a person’s real-world identity. However, if an address is used in an exchange that applies “know your customers” (KYC), in which some personal information has to be given, then the address can be easily traced to a real-life identity.
Overview of Bitcoin Blockchain
Bitcoin is often viewed as an untraceable method of payment that encourages lawbreaking activities by criminals to carry out transactions without being traced. This implies that users can carry out transactions in complete anonymity – that their identities cannot be exposed. However, that is not the case. While Bitcoin enables increased privacy, concerning other orthodox payment methods involving a third-party intermediary, it is not as anonymous as a typical cash transaction.
Since no third-party intermediaries exist in this transaction system, people wonder if there is another way to verify a transaction between two users to prevent “double spending” – to prevent a user from spending a bitcoin he has previously transferred. This is where a revolutionary aspect of cryptocurrency – the blockchain – comes into play.
Blockchain is a digital ledger of transactions that is duplicated and publicly distributed across a group of computer systems. Every transaction is confirmed by a group of users in a peer-to-peer network, called miners.
They compete to solve computation problems. The first miner to successfully validate the transaction broadcasts the results to the network, which then checks it. Once verified, the new transactions are added as a new block to the blockchain. For bitcoin, this successful miner is then rewarded with new bitcoins. Blockchain is so reliable because there’s no one in charge. With this technology, bitcoin cannot be hacked, cheated, or double-spent. Blockchain, once used exclusively with Bitcoin, is now a widely adopted technology that is used by other cryptocurrencies.
Enhancing User’s Privacy
There are ways through which privacy can be enhanced on Bitcoin Blockchain and other platforms like Bitcoin Prime. A bitcoin user may decide to use a new bitcoin address for every transaction, and this generates a new public key for every transaction he makes, thereby rendering it more herculean to trace one particular individual’s transaction to a specific address.
Also, a user can decide not to store bitcoins in online third-party wallets – this can considerably reduce the risk of exposure to hacks. Furthermore, a bitcoin user can also reduce the risk of traceability on third-party by taking a certain precaution during transactions. He could use the anonymous Tor browser to make the exchange, and create an account without necessarily revealing any real personal information. In this way, the IP address – and other personal information – will not be exposed.
Ultimately, some bitcoin mixers can link users, and this allows them to mix their bitcoins. This makes it harder to trace specific users because only a group of transactions – and not individual transactions, which can be easily traced – are published on the blockchain.
Even though Bitcoin addresses embrace pseudonymity – as they cannot reveal the identity of the bitcoin owner – they can often be linked to real-life identities. Several advanced techniques can be used to tie Bitcoin addresses to physical identities. To prevent this, Bitcoin mixers can cloak a user’s identity.
Bitcoin mixing is the process in which users “mix” their coins in a pool of funds. By mixing their coins, Bitcoin users can cloak the ties – because transactions, on the blockchain, appear in groups – between their Bitcoin address and their physical identities. This enhances a user’s privacy when using Bitcoin.
Bitcoin mixers: How do they work
There is a wide range of strategies on how mixers work – from centralized solutions, where the users enter their address only in a form that is dictated by the mixing service’s website to begin a transaction, to solutions, where users do not trust anyone.
This involves services that take bitcoin payments, and send different coins in return. For a mixer with many users, it is difficult for an “outsider” to tie incoming coins to outgoing coins. Again, this enhances the privacy of the user. However, there are downsides to using centralized mixers. Users must trust the mixing services with their privacy. With this, a trail of ownership may be established because the mixer has full knowledge of which user sent and received which coins. If the mixer then decides to share this information (probably required by law or for some other reason), the user would lose his privacy.
Secondly, the mixing service operator might decide not to make any return payment. Therefore, he might decide to steal funds, track coins, or purposefully go out of business, taking the user’s funds with them. Many services recognize this risk, and they offer short laundering periods, which leads to reduced transaction volume.
This is a cryptographic extension that fixes certain weaknesses in Bitcoin. It is needed to add real cryptographic anonymity to Bitcoin transactions. Since Bitcoin transactions are stored in a public ledger, transaction history can be traced. What Zerocoin does is provides for anonymity by introducing a separate zerocoin cryptocurrency that is stored in the Bitcoin Blockchain
Zerocoin extension to Bitcoin is akin to a money laundry pool, bringing Bitcoin together temporarily in exchange for a temporary currency called zerocoin.
Although Bitcoin is not anonymous – rather, it is pseudonymous because transactions placed on public ledgers are traceable. However, as mentioned above, several means exist to improve anonymity when carrying out a bitcoin transaction. A user can either mix his coins with those of another user, or he can store his bitcoin in an online third-party wallet, or he can make use of zerocoin. However he chooses, privacy can always be enhanced.