Is Blockchain Compatible with Privacy?
The blockchain is a distributed ledger which records transactions between parties in a permanent and secure way. The technology has many possible applications, with the most well-known application being cryptocurrencies such as Bitcoin and Ethereum.
For cryptoholders, the benefits of blockchain include anonymity, no risk of fraud or central authority interference, and price stability.
This month’s article, however, will focus on the anonymity provided by blockchain technology. The topic is a particularly hot one at present due to the recent boom in new cryptocurrencies, many of which are marketed as fully anonymous or private alternatives to Bitcoin.
There are also many rumours circulating that various governments around the world are considering ways to ban Bitcoin or other cryptocurrencies – anonymous ones in particular – even though government regulation of blockchain seems like an impossibility.
The main question, therefore, is whether blockchain technology actually offers any meaningful degree of anonymity by default.
This question is best addressed by example. Before we begin, it should be noted that the examples below are not exhaustive, but they do cover a significant portion of the spectrum.
The scale of anonymity provided by each method is also not easy to quantify, but it can be generally categorized as weak (transactions linked to IP/email addresses), medium (transactions linked to public wallet addresses), and strong (only transactions/addresses linked to digital signatures are known).
A few more words about public blockchain technology: For the purposes of this article (and most others), the term “public blockchain” refers to any blockchain which is accessible by anyone.
There are also assets such as Ethereum, Ethereum Classic, Dash, ZCash, Monero and so forth which are all considered public blockchains, but they do not have tokens which can be publicly traded on any exchanges.
The first example of anonymity provided by Blockchain technology is that your account balance and history cannot be linked back to you directly without your consent.
It is possible to pay yourself with someone else’s money without revealing your own identity, but in a world where every major cryptocurrency includes an address-based public key (or “wallet”) for receiving coins, the anonymity offered by “cold staking” can be called into question.
The infamous DAO hack happened only recently. The hacker sent ether to himself from an account which was not his own, and this gained him access to a large amount of funds. This raised concerns about the security of Ethereum, particularly among its more prominent investors.
However, there are multiple other examples of such hacks which did not result in any loss of funds for the hacker . Not even a single bounty was paid to prevent such exploits from happening.
By performing a few simple tricks , it is possible to make your own coin address appear as if it belonged to another person on the blockchain. This allows you to retain your anonymity or privacy.
This method is only effective against the less technical individuals, however, so don’t rely on it if you are going to be putting a lot of money into your coin addresses.
One of the largest and most popular cryptocurrency exchanges in the world, Bittrex , has gone ahead and implemented their own version of this feature.
They call it “Privacy” and allow you to create a new wallet address for every transaction , which prevents your transactions or addresses from being associated with each other in any records. After creating a new address, the ‘Privacy’ feature must be enabled for the wallet to work.
It should be noted that Bittrex uses its own internally-developed blockchain technology. It is currently not possible to link your wallet addresses and transactions to your IP address or email.
One of the main selling points of cryptocurrency is that you can send money to someone without it being traceable. Unfortunately, this is largely false.
The ‘trackerability’ provided by blockchain technology is certainly weaker than that provided by traditional financial institutions, but it still exists.
Transactions are irreversible on the blockchain. You could be 100% sure that the transaction between you and someone else has been sent, but it’s quite difficult to prove convincingly that no one has ever tried to stop such a transaction from happening in the first place.
The most famous unsolved case of transaction reversal was the 2014 hack of Mt. Gox , which resulted in the theft of hundreds of millions of dollars worth of Bitcoin and Bitcoin Cash. To this day, however, no one knows for certain whether they will ever be able to reverse these transactions (or even if it’s possible).
Given that blockchain can’t be used to any advantage without being linked to IP addresses/email addresses, web browsing history or digital signatures, it might appear that all privacy and anonymity has been taken away by this point. However, it’s important to remember that blockchain technology is only as good as the cryptocurrency which is using it.
For example, Monero recently implemented Ring Signatures . This means that Monero transactions are now much more difficult to unmask. It’s still possible for transactions to be linked to IP addresses/email addresses/public key pairs, but at least this kind of link can no longer be forged or faked by any two-bit hacker with a copy of Photoshop.
Given the fact that Monero is one of the more popular cryptocurrencies in the world, this form of crypto-privacy should be considered to be medium-grade.
The last example of anonymity provided by blockchain technology we will look at is arguably the safest and most reliable method.
It involves sending cryptocurrency directly to an address which was created specifically for you by a trusted friend or family member. This method provides you with a truly anonymous and untraceable transaction with no digital signature required.
Private Blockchain Technology
The idea of a private blockchain is pretty self-explanatory: it is only shared among the members of a group. It is a specialized ledger (or database) which allows transactions to be made between the parties of an agreement, but which cannot be accessed by the public at large.
The most famous example of private blockchain technology is the blockchain implementation used by the banks and other financial services in Sweden. This is a “permissioned” blockchain, which means that only certain businesses or individuals are allowed to access it.
The ‘permissioned’ part of the concept refers to the fact that any transactions made on a private chain are only accessible by those with permission.
The most popular cryptocurrency in Sweden is XEM , which was created using permissioned blockchain technology. It’s possible to buy and sell XEM from any website which sells cryptocurrency, but it’s currently impossible to create an XEM wallet address without permission. This permission is controlled by the developers of NEM.
This is true for most cryptocurrencies, particularly those which are based on PoW or PoS methods of consensus. In order to participate in a blockchain transaction, you have to use a coin address which has been authorized by the developers of that blockchain.