Blockchain technology has been praised as a solution to many contemporary issues in the online world. Web 3.0, the blockchain-enhanced internet, can help users to reestablish their personal anonymity.
But how does blockchain promote privacy and anonymity, when it also openly displays the entire history of transactions that anyone has ever made?
Blockchain privacy essentials
- Most blockchains offer anonymity by pseudonym, or pseudonymity.
- Blockchain addresses are identifiable with public keys and accessible with private keys.
- By default, blockchain contains no information on the user’s offline identity.
- Zero-knowledge proof systems enable verification without disclosing data.
Blockchain is pseudonymous
Public blockchains of the largest cryptocurrencies, such as BTC, ETH and BCH, are completely transparent. The history of every BTC, for instance, can be tracked from the block where it was mined to the wallet in which it is currently stored. Similarly, the history of transactions for all addresses can be tracked, as well, since addresses are identified by public keys, and these are visible to everyone.
However, even though it is easy to figure out what transactions someone has made, it is impossible to say who that someone is. The identity of the owner of the public key cannot be inferred from the blockchain. The only way to expose a blockchain user’s identity is to establish an indisputable connection between them and their public key.
This is easier said than done, since there is no personal information, such as a name, address, contact number or email, that a user is required to disclose when creating a new address on the blockchain network. The connection between you and your public key can only be made known by means beyond the blockchain (theft, pattern tracking or voluntary revelation). Blockchain users are anonymous by pseudonym, or pseudonymous.
Blockchains favoring untraceability
Not all blockchains allow for the tracing of transactions and coin history. Some blockchains, such as Monero or Zcash, take anonymity a step further by actively preventing transaction traceability. No trade on these blockchains is public, and no transaction history of a given address is discernible from the chain. The technology allowing for this kind of anonymity is based on zero-knowledge proof technology.
Zero-knowledge proof systems allow for claims to be verified without the need to disclose any data. Let’s say that you want to send 1 unit of crypto across a blockchain network. In Bitcoin transactions, you first need to provide proof that you own 1 BTC from previous transactions. In zero-knowledge proof-based blockchains, this isn’t necessary. The validators are able to reliably verify everything without actually knowing what they’re verifying (they have “zero knowledge”).
Regardless of whether your cryptocurrency of choice uses zero-knowledge proofs or not, every transaction you make increases the likelihood of your identity being revealed. Web trackers and cookies trace your activity on the Internet, so if you make a purchase at an online store, you’re risking exposure. If you’re receiving monthly wages to your blockchain address, the regularity, the sender and the amount can solidify the link between you and an address.
For example, if you always buy books from the same online store and pay from the same Bitcoin address, whoever has the knowledge of who has the books can figure out who owns the address. The more connections like these they make, the more certain they can be of your identity.
The fact that blockchain allows users to remain as private as possible in the digital world means that you can trade in cryptocurrency with confidence. That confidence will be further strengthened by trading via a reliable, long-standing professional exchange, like Bitstamp.
This webpage has been approved as a financial promotion by Bitstamp UK Limited which is registered with the UK’s Financial Conduct Authority. Please read the Risk Warning Statement before investing. Cryptoassets and cryptoasset services are not regulated by the Financial Conduct Authority. You are unlikely to be protected if something goes wrong. Your investment may go down as well as up. You may be liable to pay Capital Gains Tax on any profits you earn.