Bitcoin and Anonymity issues
Most regulators in different countries are hunting for platforms without official identification procedures (KYC), so the anonymous purchase of cryptocurrencies is becoming increasingly difficult.
After all, the crypto space has always taken the protection of online identity very seriously, and there are solutions that still contribute to this. It is enough to visit Coinmarketrate.com to make sure how seriously crypto projects approach this issue.
Take a look at the most popular ways to work with bitc without revealing your name.
CoinJoin, a solution that increases the privacy of bitcoin transactions through the use of joint transactions.
CoinJoin was proposed by Gregory Maxwell in August 2013 in a post on the BitcoinTalk forum. There he explains that the privacy of Bitcoin depends solely on the use of pseudonymous addresses. The problem is that these addresses are traceable and easy to hack, especially in case of reuse. They allow you to track payments, can be indexed on the Internet, etc. After a breach of confidentiality, it is difficult to restore it, and sometimes impossible.
According to him, the lack of confidentiality represents a systemic risk for Bitcoin, since theoretically it is possible to create a centralized list of “good” or “bad” BTC, which will jeopardize the interchangeability of crypto coins. In this case, some parts of them, or full coins may no longer be accepted because they are blacklisted.
Coinjoin for “combined transactions”
The proposed solution was developed for use on the Bitcoin network without making any changes to the protocol. Before getting to the heart of the matter, it is important to remember that a Bitcoin transaction can have multiple inputs and multiple outputs, in other words, multiple wallets can transfer using only one common transaction.
In 2013, it was widely believed that the sharing of multiple wallets of a single transaction implies that one person is responsible for the wallets present in the transaction. Here gmaxwell comes to the rescue: why can’t different people unite to combine their transfers in one transaction?
It is this concept that is used in Coinjoin: several users unite to perform one joint transaction, thereby breaking the connection between the sender and the recipient of the transfer.
This system provides many advantages, the first of which is a reduction in commission for each user participating in the transaction. In fact, instead of each transaction conducting a transaction and paying X times more fees, one joint transaction with a single commission is issued.
The second and most innovative advantage is increased privacy. Imagine that N users want to send the same amount to N recipients, they can make a joint transaction. As a result, it will be almost impossible to determine which user sent to which recipient. In this method, the more users, the higher the privacy.
CoinJoin transactions can be compared to mixing: the idea is not to determine which issuer and which recipient are connected.
This has two main drawbacks that other anonymity protocols have managed to overcome:
- transaction amounts are only partially violated, although it is difficult to link the sender and recipient, the exchanged amounts remain visible to everyone;
- not using a single address allows anyone to access the address’s transaction history, thereby not providing a high level of user privacy.
As we see, this solution can be used in Bitcoin, although it has drawbacks. Other cryptocurrencies have also adopted this concept and adapted it, for example Dash (DASH), whose PrivateSend is a modified version of CoinJoin. But there is another fairly popular solution – CryptoNote.
CryptoNote: Anonymous Transaction Protocol
CryptoNote is a protocol that has been used since 2013 to increase the confidentiality of transactions through the use of unique addresses and ring signatures.
CryptoNote was proposed by Nicolas van Saberhagen in the technical paper “CryptoNote V2.0” in October 2013.
Unlike Coinjoin, the idea here is to create a new protocol that will overcome the disadvantages of Bitcoin, while adding features that ensure the anonymity and privacy of its users. The purpose of the protocol is to fulfill two conditions for transactions:
- Impossibility of tracking: for each incoming transaction, all possible senders are equally likely.
- Non-associativity: For two outgoing transactions, it is impossible to prove that they were sent to the same person.
Only the second condition can be met for Bitcoin using Coinjoin. In his technical paper, Nicholas van Saberhagen reveals a scheme of completely anonymous transactions that satisfy both the conditions of impossibility of tracking and non-associativity.
For the two conditions presented above, several technologies were used and combined to achieve a common goal.
Using unique addresses
The first is the use of unique public keys. These public keys are derived from the recipient’s address and the data of a random sender, which solves the problem of address reuse.
Indeed, the reuse of addresses creates a big anonymity problem. When we know the user’s public address (as in the case of Bitcoin), we can access the transaction history.
Thus, no observer can determine whether transactions were sent to a specific address or link two addresses together.
In addition to this, CryptoNote uses a one-time ring signature – to ensure that tracking is impossible. This approach is in some ways comparable to how Coinjoin works: a ring signature allows you to sign a transaction with N public keys and one private key corresponding to one of the N public keys. These public keys are selected from all blockchain outputs having the same amount as the output spent.
An external observer can verify the signature and confirm that one of the public keys present in the transaction matches the private key with which the message was signed. However, he can’t know which one.
Again, the greater the number of N public keys used, the less likely it is that you will become the sender, and therefore your anonymity increases.
CryptoNote is used in many cryptocurrencies, such as Monero or Bytecoin, while several implementation options are known. For example, in the case of Monero in January 2017, the protocol was improved to integrate Ring CT. This improves ring signatures, allowing you to hide the amounts, sources and destinations of transactions with reasonable efficiency.
Well, the last thing worth mentioning is MimbleWimble.
What is MimbleWimble
MimbleWimble is a protocol created by an anonymous developer, with an emphasis on transaction confidentiality. This is, in particular, the protocol used by promising cryptocurrencies BEAM and GRIN.
MimbleWimble was proposed in 2016 by an anonymous developer who signed a whitepaper named Tom Elvis Riddle. This is a reference to the evil hero of Harry Potter, and this anonymity reminds us of Satoshi Nakamoto and Bitcoin.
MimbleWimble is not intended to reinvent the wheel, its protocol seeks to guarantee anonymity by combining two methods: Coinjoin and confidential transactions.
Coinjoin and Confidential Transactions
As we explained above, Coinjoin allows you to break the connection between the sender and the recipient of a transaction by combining a large number of transfers into one transaction. However, it does not allow you to hide transaction amounts.
This is where confidential transactions come into effect. This type of transaction allows you to disclose the amount of the corresponding transaction only to its participants. This is achieved by using Pedersen’s commitment, which allows the user to create a message m, which will be encrypted using the secret r, using the commitment algorithm: c = C (m, r). This is a parameter c that is publicly disclosed, but its contents can only be decrypted if there is a secret r.
These transactions can still be confirmed thanks to zero-sum verification, where the sum of inputs minus the sum of outputs is always zero, which allows cryptographically confirming all transfers contained in the transaction.
On top of that, where Bitcoin uses public addresses for transfers, MimbleWimble works without addresses. Transactions are created interactively using two or more wallets exchanging the data required for the transaction privately.
Note that the MimbleWimble protocol has so far been implemented by different teams, including BEAM and GRIN.
BEAM Confidential Assets
BEAM is one of the cryptocurrencies based on the MimbleWimble protocol. In addition to the privacy elements described above, the development team has integrated a new feature: confidential assets.
This process allows you to mark BEAM coins to create various matched tokens, developing in the BEAM block chain, and taking advantage of the private functions of the MimbleWimble protocol.
To mark the corners, the issuer will be able to specify additional metadata parameters, including the token name, the general delivery and release schedule, the issuer’s certificate, and much more.
These tokens can then be traded, but can also take advantage of the protocol’s full set of privacy features. Thus, the token type can also be hidden without revealing any information about the token type or the number of transactions.
The team describes them as tokens that can eventually represent almost any asset (for example, for use in STO).
This protocol is very promising from the point of view of anonymity, since it combines many characteristics within a single project using unique addresses, the possibility of transactions and denial of amounts.