There’s no shortage of sensationalism where the pseudonymity of the Bitcoin ledger is concerned. Perhaps it stems from the misconception that Bitcoin is a ‘fully anonymous’ cryptocurrency. Or perhaps it’s the skeptics, trying to spread FUD by reiterating a point that’s been made for years.
To be clear, you absolutely can trace transactions on the blockchain (we’re talking about a public ledger in the age of Big Data, after all). This isn’t by any means a new discovery –companies like Chainalysis have been used by the IRS to follow transactions (albeit through undisclosed methods), and open-source tools like BlockSci aim to assist developers in analysing the blockchain. Let’s not forget the recent Snowden revelation that even the NSA, the masters of surveillance, made it a top priority to track down Bitcoin users in 2013, either.
Amazon granted data gathering patent with a scope on Bitcoin
It shouldn’t come as a surprise that companies are jumping on the bandwagon. That said, few could have predicted Amazon’s first foray into the cryptocurrency world: a patent (filed in 2014, but only recently approved) for what they described as a ‘streaming data marketplace’, which would aggregate information linked to Bitcoin transactions that take place on a platform, such as IP addresses and personal identifiers like shipping addresses. Why this fairly unremarkable concept needed copyrighted is beyond me, but then again, Amazon once filed for (and was granted) a patent for photographing objects and people against a white backdrop.
Two predominant reactions emerged from the crypto community following the announcement. On one side, many users took the news as a bullish indicator that Amazon may be preparing to enter the cryptospace properly – they may be on to something, given the more recent news that Amazon Web Services are integrating a middleware solution, offering templates for the easy deployment of Ethereum and Hyperledger blockchains.
On the other, the announcement has sparked outcry that Amazon is going to destroy the anonymity of the network, due to use cases listed including the ability for law enforcement and governmental agencies to subscribe to feeds that bundle together personal data with Bitcoin addresses and transaction IDs. It’s a questionable decision, particularly at a time when the Cambridge Analytica scandal is still an open wound and GDPR fast approaches the compliance deadline, to put forward a service that sells user data in such a blatant manner.
To say that this spells the end for Bitcoin users wishing to transact in (relative) secrecy is an argument relying on a few major assumptions that lead to a fallacious line of thinking. First and foremost is the presupposition that Bitcoin users keep their funds in one wallet, a practice many frown upon from a security standpoint. As we previously explored, leading experts recommend a mix of hot and cold wallets to match one’s threat model. In most cases (exempting those where funds need to be spent and received frequently), the bulk of one’s holding should be kept in a HSM, and only small amounts should be transferred to other wallets as required. It’s incredibly easy to generate private keys for this purpose and to constantly create new wallets as opposed to using the same one repeatedly.
So couldn’t an adversary simply trace the transactions from the purchase back to the user’s cold storage wallet? Certainly, but not without a cost. Some services will blacklist coins depending on the wallets they’ve been through prior, up to five hops back. As the team over at Samourai Wallet explained it in our recent interview, it’s trivial to add additional hops (their premium service Ricochet incorporates another four for outgoing transactions) to circumvent this. It doesn’t matter if it’s obvious that this method is being used to obfuscate the path that coins have taken – it’s expensive for companies to find this out at scale. It costs nothing, however, for a user to throw a new wallet into the balance to add a hop if services decide to scrutinize coins further.
This feeds into a bigger idea about the tech involved. Bitcoin is not what it was five years ago. It’s not even what it was a week ago. As I type this, the Lightning Network has just reached 2,000 mainnet nodes. The layer 2 solution for the network uses onion routing (à la TOR) to enable off-chain transacting. Once a transaction has been written to the ledger, the coins can move around the Lightning Network hundreds of times before a second on-chain tx needs to be published.
What do Bitcoin's fungibility fighters say?
You see, the technical tour de force of the currency conceived by cypherpunks is evolving beyond current methods for deanonymising it. The Lightning Network is just the tip of the iceberg: there’s everything from the physical OpenDimes for off-chain transactions, to CoinJoin implementations (as seen in the ZeroLink protocol and JoinMarket) and MAST being developed to provide additional confidentiality in transactions.
The Bitcoin ecosystem has no shortage of competent devs making it their mission to enhance the suite of tools available to users to mask their activity – fungibility is a key aspect of Bitcoin, after all. As these tools grow more sophisticated, and services (exchanges and marketplaces, for instance) begin to make use of decentralised infrastructures, it’s only going to get harder for opponents to trace transactions.
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