When first reading or learning about bitcoin, one is bound to hear that it is a decentralized and anonymous cryptocurrency. The decentralized nature will not be the focus of this article. Rather, we will be questioning whether bitcoin is truly anonymous and to what degree.
The first question that needs to be answered is what does anonymity mean in the context of crypto? A literal interpretation of anonymity means “not identified by name.” At first glance, one could argue that since bitcoin deals with only addresses (the alphanumeric character string that identifies possible destinations for bitcoin) bitcoin is anonymous. In other words, since no one’s name or identity is intrinsically bound to the bitcoin blockchain bitcoin is indeed anonymous. This argument is initially persuasive, but a more rigorous approach leads to a slightly different outcome.
A more precise argument is that Bitcoin is pseudonymous. Pseudonymous means that false names are being. An example is how Satoshi Nakamoto is believed to be the pseudonym of bitcoin’s founder. Further elaborating, each address you use to store your bitcoin can be thought of as one of your pseudonyms very much like the pseudonym a person may use for a reddit or bitcointalk account. If you are currently logged into Crypto-News, you are most likely using a pseudonym as well. While the average user does not use more than one account on the above-mentioned websites, it is common for a bitcoin user to have multiple addresses used to store their bitcoin. This just means that each person’s presence on the bitcoin network is commonly associated with a multiple of pseudonyms (addresses) and their associated transactions.
Oftentimes the purpose of using a pseudonym is to achieve privacy. This would mean your activity on the bitcoin network cannot be linked to your identity. Given that blockchains are public, if someone were to associate one or many of your addresses to your identity, you would lose your privacy. Unfortunately, the average user does not take the necessary steps to afford privacy. First, most cryptocurrency exchanges require you to authenticate yourself with identification therefore forfeiting your privacy to them. This however, is not much different from a bank, as long as you trust the institution. Second, side channel information about a certain address such as most frequent usage time and public merchants it is exchanging with may provide sufficient information to link the address with an identity. To achieve privacy there are several techniques and services available, however, those are outside the scope of this article.
In an academic setting, for bitcoin to be anonymous, it must have two properties: pseudonymity AND unlinkability. We know that bitcoin has the first property as long as you are careful about providing your identity online and use multiple addresses to store and transact your bitcoin, but what is unlinkability? From “Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction” unlikability is defined as the following:
- It should be hard to link together different addresses to the same user.
- It should be hard to link together different transactions made by the same user.
- It should be hard to link the sender of a payment to its recipient.
Given there are multiple of techniques and analyses an adversary can use to associated transactions and addresses to a single user, it is very difficult to achieve full unlinkability. There are some techniques such as mixing and using stealth addresses that can provide partial unlinkability to your bitcoin presence, but it is sufficient to say that bitcoin was not designed for full anonymity. As cryptocurrency that was designed with anonymity in mind is zcash. Of course, to say one cryptocurrency is better than another, multiple factors in addition to security must be looked at. It is sufficient to say each legitimate cryptocurrency has an intended us, pro, cons, and user base.
Is Bitcoin’s lack of anonymity bad? To answer that, let us first answer why someone may want anonymity. First, it can protect personal information such as salary and spending habits. Second, it can protect businesses from publicly announcing financial maneuvers on the public blockchain. However, if your purpose in using Bitcoin is to improve the fungibility, speed, and global reach of your liquid capital while decreasing your exposure to centralized fiat currency, then the lack of anonymity may not be an overwhelming negative. Also, if you are making casual legal transactions, simply storing, or trading, anonymity may not even be a priority. Linking your bitcoin presence to your identity is by no means simple for an adversary. Therefore, if you are a benign entity such as yourself (we hope!), it is very unlikely that you will be exposed to a malicious entity because bitcoin is not anonymous. Nevertheless, as bitcoin continues to mature, its unlinkability property may be improved or users may choose to use other cryptocurrencies with greater anonymity benefits.
We hope this article provided basic insight into what it means for a cryptocurrency to be anonymous and where bitcoin fits in terms of classical definitions. If you have any comments regarding cryptocurrency anonymity or privacy, please feel free to post in the comment section below!