Is Cryptocurrency Anonymous? The Myth of Anonymity Debunked

Anna Buczak
15 March 2020 · 4 min read

Perhaps you have heard the rampant myth, which has been going around for years, that cryptocurrencies are anonymous. Of the top two largest cryptocurrencies by market cap: Bitcoin and Ethereum, neither truly allow you to conceal your identity. That goes for most cryptocurrencies you have probably heard of. In the early days of bitcoin the blockchain was thought to be anonymous (and was unjustly smeared by the media as only useful for criminals and terrorists).

As it became clear that Bitcoin transactions could be traced (more on that later) the need for privacy drove innovation. Now cryptocurrencies exist that allow for truly anonymous blockchain transactions. Zcash, Dash, and Monero are some of the few cryptocurrencies that provide the user with some degree of anonymity. Privacy is a fundamental right. It’s no one’s business what purchases you choose to make. You probably would not post your (or your business’) visa statements publicly online, so why would you want your transactions via crypto to be permanently logged for all to see on the public blockchain? In this article, we will explain why the top two cryptocurrencies by market capitalization are only pseudo-anonymous and explain how Zcash, Dash, and Monero achieve an anonymous blockchain system.

Pseudo-anonymous cryptocurrencies:

Bitcoin

Bitcoin is not fully anonymous. It is only pseudo-anonymous. This is due to the fact that every user has a public address that could theoretically be traced back to an exchange account or IP address via network analysis thus revealing the user’s real identity. If a bitcoin address can be linked to someone’s identity there is zero privacy provided by bitcoin as the leger is public and widely available. There are a few ways to match digital wallet addresses to people’s identity. One is through the Know Your Customer/Anti-Money Laundering policies at major crypto exchanges. Another way, as mentioned before, is blockchain analysis which includes address clustering as one available method. The bitcoin ledger includes information on the balance in each account so if someone ties your identity to your digital wallet they will also know exactly how much bitcoin you have.

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overview #max700#

Ethereum

Ether, generated by the Ethereum platform, is the world’s second-largest cryptocurrency by market capitalization. Ethereum is a public and open-source cryptocurrency system that features smart contracts. It is pseudo-anonymous and faces the same threats to having one’s identity revealed as bitcoin does. However, just recently, on February 1 of this year, there was a big jump forward in Ethereum wallet custom development when the ability to make transactions anonymously with Ethereum became possible with the Aztec protocol. Despite this, the vast majority of Ether transfers are not anonymous. Any ether in your Ethereum wallet right now could potentially be traced back to your identity (unless you have jumped on the Aztec protocol early).

Anonymous cryptocurrencies:

Zcash

Zcash is a blockchain-based cryptocurrency built from Bitcoin core code. However, this custom cryptocurrency platform prioritizes security and allows for the private transfer of funds. It does this by utilizing a protocol known as zero-knowledge proof which is a cryptographic technology that enables encrypted transactions to be validated and confirmed. What this means is that, using Zcash, you can complete transactions while concealing your identity. Nobody knows who sent or received funds or the transaction amount using zero-knowledge proof. However, despite the superb privacy benefits to using zero-knowledge proof only 5% of Zcash is stored using it. Most transactions (95%) of Zcash are stored in addresses that are transparent and offer little to no privacy. This may be due to the added cost and effort of transacting anonymously using zero-knowledge proof.

Dash

Dash is the 20th largest cryptocurrency by market cap. One feature added during the cryptocurrency platform’s development was “Private Send”, an option allowing for the anonymous transfer of funds. Dash lets you keep your financial transactions and fund balance private. Dash achieves anonymity via a mixing protocol. This anonymizes transfers through mixing the transactions between several addresses and combining the funds so they can’t be uncoupled and traced back to the original user’s identities. This complex process is completed via a decentralized network of servers known as “masternodes”. Despite the ability to make anonymous transactions, there is a downside to Dash. Not all transactions are completed with private send, so it could be the case that using it and mixing your transfer could be considered suspicious. Although it’s impossible to follow who you send dash to via private send’s mixing it is possible to see when you send money using private send publicly.

Monero

Monero is the 16th largest cryptocurrency by market capitalization. It is the most private and provides the best anonymity of all cryptocurrencies. Monero was launched in 2014 and is an open-source and privacy-focused cryptocurrency built on distributed ledger technology. All Monero transactions are untraceable. The cryptocurrency uses ring signatures and stealth addresses to mask the true identities of senders and receivers of Monero. In addition, transaction amounts are hidden through Ring Confidential Transactions (RIngCT). This cryptocurrency platform ensures total anonymity for the sender, receiver, and holder of funds.

Conclusion

It is a myth that bitcoin and other public ledger-based cryptocurrencies are anonymous. However, advances are rapidly being made in cryptocurrency platform development. Ethereum, a cryptocurrency that used to be only pseudo-anonymous, now allows for private transactions between Ethereum wallets with the Aztec Protocol. Bitcoin, however, does not yet present this option. With public ledger cryptocurrencies, every wallet has a public address that could potentially be used to trace back to the user’s true identity. Zcash and Dash both offer the feature of sending crypto anonymously. However, it is not mandatory on either platform to use the feature making it potentially suspicious to use it. Also, it is still public information that you used the anonymizing feature to send funds. If you want to send and receive cryptocurrency completely anonymously as well as hold your funds in an account whose balance is not public you want to use the most private and secure cryptocurrency that exists right now: Monero.

Are you planning cryptocurrency platform development? Don’t hesitate to get in touch, we can help you choose the best option to suit your business.

Related blogposts:

Hot Wallet vs. Cold Wallet: What's the defference?

Are Your Assets in a Digital Wallet Secure?

PODCAST - The Differences Between Public Blockchains

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