Crypto and anonymity

Cryptocurrencies such as Bitcoin and the like have been billed as the payment method of the future. However, many wrongly believe that cryptocurrencies are anonymous like cash and don’t fully understand how one’s identity can be revealed.

As a matter of fact, Bitcoin and the majority of other transactions are pseudo-anonymous. This is because transactions take place via pseudonyms (addresses) that can be traced back to the parties when clustered together. It’s worth noting that there are even companies such as Chain Analysis, BlockSeer, CoinValidation and others actually provide identification services.

There are parts of the crypto community who are worried by such developments, especially the idea of marking or colouring coins to show where they have come from. It is argued that this will harm the fungibility of cryptocurrencies since “tainted” coins would come to have less value than “clean” crypto.

A reddit post cites a paper on an 18th century Scottish case following the introduction of banknotes set a precedent which many believe holds true today for cryptocurrencies. The paper quotes the case, highlighting that marking notes to show their origins “would indeed be ‘a barr to the circulation’ of notes and hence a threat to the whole idea of paper money.

Using this concept, marking coins depending on their source could bring down cryptocurrencies, although there are other means which can implemented to clean coins of their dubious history. One such method is tumbling or mixing cryptocurrencies.

A cryptocurrency tumbler improves anonymity by mixing coins from different sources. Since the blockchain ledger is open for anyone to view, transactions to/from different addresses can be monitored. Tumblers work by mixing coins together, although here it is important to stress that coins themselves are untraceable, only the addresses and transactions are. The tumbler sends the coins to others in varying quantities and then back to the owner, whilst also alternating the times of the transaction.

Moreover, since Bitcoin’s high price makes it more of a store of value (like gold), there are other cryptocurrencies that can be used as a medium of exchange for purchases that preserve anonymity at a higher level without having to take additional measures which usually incur charges.

There are crypto assets such as Monero and Zcash which work on different protocols — CryptoNote and zk-SNARK (zero-knowledge Succinct Non-interactive ARgument of Knowledge) respectively — to the Bitcoin protocol and these two cryptocurrencies adopt different methods of obfuscating transactions so that it becomes difficult to identify the parties.

Unlike Bitcoin, every transaction using Monero generates a new, single-use address to be generated. The thing is, Bitcoin users could generate one-time addresses on the blockchain for each transaction to conceal their trail, and this is recommended, but Monero requires this to take place.

Meanwhile, Zcash works on the concept of zero knowledge proofs: a way to prove that a certain assertion is true, but without revealing any additional information. This is coupled with encryption and even a hidden blockchain message that can be included together with the transaction, giving the currency a new dimension as a private way to communicate via blockchain.

Advocates of such cryptocurrencies with additional anonymity protocols argue that only the anonymous nature of crypto will preserve its fungibility and mean that it can be considered currency. Since Bitcoin is identifiable, let it be a tradable store of value, whilst users who want to remain anonymous in their transactions can do so by using other cryptocurrencies.

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