Is Bitcoin Anonymous? | Blockchain Central

Hi guys, thanks for tuning in for another
episode on Blockchain Central. In this video we’ll shed some more light
on the aspect of anonymity in the Bitcoin system. Is Bitcoin really an anonymous currency? Before we dive right in, please note that
this content does neither represent financial, legal, or tax advice, nor is it supposed to
be understood or interpreted as solicitation to buy or sell any securities, coins or tokens. What does anonymity mean in the context of
Bitcoin? You might be surprised to find out that under
some circumstances, using Bitcoin as a means of payment is actually a lot less anonymous
than using good old cash. Hence, in this case, the transparency and
accessibility of all transactions on a public ledger is a double-edged sword. On the one hand, it is an important feature
for creating consensus among all network participants and to validate transactions, which creates
trust. On the other hand, all the publicly broadcasted
information can be aggregated and potentially used to attempt to uncover the identity of
users behind wallet addresses. So if you’re actively using and spending
your digital currencies, this is an important aspect that you need to be aware of. Before we dig in deeper, though, let’s first
start with a basic question: what exactly is Bitcoin if it’s not anonymous? Well, you may know from watching our video
on wallets that your Bitcoin wallet address is a so-called public key. In fact, it’s the hash of a public key to
be precise. Sounds difficult? It just means that you don’t need to use your
real name in order to interact with other users in the Bitcoin system when sending or
receiving your coins. What is published instead are the public key
hashes that act as a sort of pseudo identities. That’s what computer scientists call pseudonymity. So, you now may wonder, if you’re using
a pseudonym, and you can even create as many of these as you like, doesn’t that make
you anonymous? Well, the short answer is: not exactly. Conceptionally, anonymity is pseudonymity
combined with unlinkability. That means, I am only truly anonymous if my
interactions with the network that I do under my pseudonym cannot be tied to each other
by someone else. That is not the case in Bitcoin. So, to answer the first question, Bitcoin
is pseudonymous and not anonymous. So, why exactly is it possible to de-anonymize
Bitcoin users? Let’s think about how Bitcoin transactions
roughly work: all transactions are processed using public key cryptography. This just means that digital signatures are
used as a way of proving ownership of your coins. The so-called chain of digital signatures
means that each transaction is linked to the output of the previous one to verify that
the user has enough funds to perform the new transaction. What happens every time a new transaction
is made, is that it is cryptographically signed by the user with his private key. Then, the transaction containing the input
and output addresses and corresponding amounts is broadcasted to the network where other
nodes can validate it. Therefore, if we think about it, the Bitcoin
system essentially consists of two layers. One that we call the application layer, which
includes the information that is stored on the blockchain and the one that we call the
networking layer, which is the peer to peer network in which messages are sent around. Both of these layers can be used to de-anonymize
users. Now that you understand that Bitcoin is pseudonymous
and both the application layer, as well as the networking layer hold information that
can be used to uncover the real-world identity behind users, let’s have a look at some
techniques that make this possible. At the application layer, someone might use
a technique called transaction graph analysis to aggregate information and investigate how
the money is moved around in the Bitcoin system among different addresses. So, what’s interesting for example is that
transactions with multiple input addresses reveal that they are owned by the same user. It means that by using a wallet software to
pay for a cup of coffee, for instance, coins from several different wallet addresses are
sourced if one of the addresses has insufficient funds, for example. This is what we call joint spending. In other words, joint spending is evidence
of joint control, if you like, because it can be inferred that all the pooled addresses
must belong to the same user. So, by transitively aggregating the addresses,
clusters of linked addresses can be collected. Since all of the information is stored in
the blockchain forever, it is possible to gain more information on the user’s activity
by looking at these clusters over time. Likewise, spending patterns can then be revealing
of the user’s identity. Another way to infer the real-world identity
from an individuals’ address clusters is by analyzing the interactions with clusters
from already known service providers. So if you think of the coffee example again,
your interaction with the coffee shop reveals an address that corresponds to you. This, in turn can be used by the other party
to then tag your cluster. Now, another important fact in this context
is the high centralization in well-known large service providers, such as wallet providers
or exchanges, for instance. Therefore, there is a high probability for
individual users to interact regularly with one of those well-known clusters. Ultimately, this makes it possible to identify
a transaction that ties the individual’s cluster with the well-known one of the service
provider. Provided that the service provider e.g. an
exchange, possesses some revealing information on his or her customers, an authority for
instance, can demand access to that information e.g. by subpoena and use it to uncover the
real-world identity of the user behind the individual address cluster. The previous two examples mainly focused on
techniques that can be applied to the Bitcoin application layer data for de-anonymization. But, as mentioned before, there is also the
networking layer in the Bitcoin system. A potential method that can be applied to
this layer to uncover the identity behind an address is entirely unrelated to clustering
and using transaction graphs. The idea here is to focus on the broadcasting
process of the peer to peer network. The point is that a node is going to connect
to many others whenever it wants to broadcast a transaction that it created. Therefore, several nodes who heard about the
transaction could cooperate and try to figure out where the new transaction came from. So if they figure out which transaction is
new and which node broadcasted the transaction, then this probably represents a direct link
between a transaction and the IP address of the user who created the transaction. Given that an IP address is quite close to
a real-world identity, this is a severe problem if you’re concerned about privacy. Since this is mainly a problem of communication
anonymity, though, and the field has received significant attention from the research community,
tools like for example Tor have been developed to communicate anonymously. Ok, so what can you take away from this video? Well, first of all, you are now aware that
there are a couple of tricks and methods that can be used to link different addresses or
transactions to Bitcoin users, because the Bitcoin system is pseudonymous, rather than
truly anonymous. What’s more, it does not stop here, but
even uncovering real-world identities or IP addresses of Bitcoin users is a possibility. Bear in mind that all transactions are stored
in the Blockchain forever and if your address is ever linked to your identity, every transaction
will be linked to you. So make sure to inform yourself about the
recommended best practices when transacting in Bitcoin and other cryptocurrencies to keep
your privacy as safe as possible. Thanks for watching, I hope you liked it and
found this overview useful. If you liked this video, make sure to hit
that like button, share it with others and don’t forget to subscribe to Blockchain
Central to never miss a beat! Happy investing!

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