February 21st, 2018
Bitcoin is not anonymous; in fact, it is pseudo-anonymous. Most Bitcoin veterans around the world are aware of this. To understand Bitcoin’s anonymity, it is necessary to understand the working process of Bitcoin on a basic level first.
How does a Bitcoin transaction work?
Bitcoin protocol consists of a series of transactions. These transactions are a package of different types of data, including transaction inputs and outputs. Inputs refer to the Bitcoin address that is used to send Bitcoin and can be sent using private keys associated with the address. Output, on the other hand, refers to the addresses where the Bitcoin is sent. Bitcoin transactions transfer digital currency from one or multiple inputs to one or multiple outputs.
It is possible for any transaction to simply have an input and an output. But such cases are rare; they would require the amount of Bitcoin sent to be exactly equal to the amount that was initially received.
It’s common that transactions consist of multiple smaller inputs to make one smaller transaction. For instance, if someone controls four different inputs of one Bitcoin each and they need to send 3 Bitcoins to any store, the tool will merge all these four inputs into a single transaction.
On the other hand, it is even more common that a transaction consists of numerous or multiple outputs, the reason being Bitcoin’s use of Change Addresses. Change Addresses allow Bitcoin users to create a transaction which returns the excess amount of Bitcoin from one of the inputs back to the sender.
What makes bitcoin ‘anonymous’?
There are mainly three reasons behind the anonymity of Bitcoin.
– Unlike traditional bank accounts and other payment systems, Bitcoin addresses are not attached to the identity of the user as protocol. Any user can create a new and random Bitcoin address anytime without the need for submitting any personal information or details to anyone.
– Bitcoin transactions are not tied to the identity of the user. An individual can effectively transfer Bitcoin from any address which controls the private keys to any other address without revealing any personal information. Interestingly, like physical cash, the receiver also need not know the identity of the sender.
– Bitcoin transaction data is forwarded and transmitted by nodes to another random set of nodes on this peer to peer network. Bitcoin nodes connect to each other using IP addresses, but it is not clear for nodes, whether the transaction data received, was created by the node to which they are connected, or that node merely forwarded that data.
How is anonymity defeated?
There are three ways to defeat anonymity:
– Though Bitcoin transactions are all randomly transmitted over peer to peer networks, this complete system is not airtight. If an attacker uses means to connect multiple nodes to this Bitcoin network, all data collected from different nodes may be sufficient enough to determine the origin of this transaction.
– Bitcoin addresses can be linked to all real identities if all these identities are used in combination with the addresses in some way. This includes all addresses used to withdraw or deposit money from or to an exchange or wallet service. Publicly exposed addresses or the ones which are simply used to send Bitcoin using a real identity.
– Most importantly, all Bitcoin transactions over the networks are completely traceable and transparent to anyone. It’s this complete transparency which allows multiple Bitcoin addresses to get clustered together, and is tied to the same user. So, if one of these clustered addresses linked to a real-world identity through de-anonymizing techniques, so can all addresses.
At the end of the day, Bitcoin users around the world enjoy a certain level of privacy based on how much of their identity they want to reveal and what anonymizing techniques they are applying. Bitcoin is successful in creating a buzz in the market because of its unique concepts and features. Millions of digital currency enthusiasts from around the world are using Bitcoin. With time, its user base is increasing, and this trend will continue for days to come.