Demystification of the blockchain
There are several common features in life, regardless of who we are and where we live. Perhaps one of the most important points is that we all use some form of money to purchase things that we need in everyday life. Some of us use credit cards, while others use cash. Even people who currently live under the barter system use goods that they produce themselves, and which can be exchanged for someone else’s goods.
No matter what kind of money we use, we want it to retain its purchasing power, so that we can continue to enjoy the fruits of our labor throughout our lives.
Inflation is the enemy of this hope. Inflation means a decrease in the purchasing power of money. Inflation can sometimes occur gradually over decades, as it happens with currencies such as the US dollar and the euro. In extreme cases, inflation can occur within weeks or months, as, for example, in Germany after the First World War or in Zimbabwe in the 1990s.
The main reason for inflation is an increase in the money supply. Economists will argue that there are many factors that cause an increase in the money supply. However, in fact, the blame for inflation lies primarily with those people who have power over money.
Inflation has been hitting various types of money for thousands of years. In fact, it is so widespread and has existed for so long that many people mistakenly think that inflation is natural, and that it must happen in order for the economy to function. As a result, societies are looking for many ways to protect their wealth from the effects of inflation.
This usually encourages them to invest in inflation hedges, which are assets whose value usually increases (that is, the price) as the money supply increases. Gold, real estate and stocks are among the most recognizable types of protection against inflation. However, investing in things like art and fine wine can also be an effective form of hedging.
The investments we have mentioned and all the means of protection against inflation, which we do not have, have one thing in common: their supply increases much more slowly than the supply of even the most tightly limited currency. To this group we add Bitcoin, the latest means of protection against inflation.
The Fantastic World of BTC
Bitcoin, cryptocurrency and blockchain have left an indelible mark on our world. From the caches of the cryptographers ‘ mailing list, these new technologies have burst into the consciousness of humanity, changing our ideas about information, finance, sovereignty and much more.
Without doubt, cryptocurrency and related technologies are becoming mainstream. Large corporations have started to buy cryptocurrency en masse. And even ordinary companies are beginning to get involved in more non-traditional parts of the market. Who could have guessed, for example, that Visa would buy the popular NFT (Non-Fungible Token) from the “CryptoPunk” series?
This is the world in which we now live, and these developments further confirm the fact that cryptocurrency and blockchain are not going anywhere. As a result, the statement of the credit card giant Mastercard that it has agreed to buy a company engaged in blockchain research probably did not come as a big surprise. Conventional businesses, like traditional finance and blockchain-based finance, continue to narrow the gap that currently exists between them.
Blockchain: Anonymous vs. Pseudonym
Before we talk in detail about what the blockchain analytics company CipherTrace is, let’s talk about the aspect of the blockchain that gives the basis for its existence.
The vast majority of public blockchains in the world, which is listed on Coinmarketrate.com today, they offer a certain level of pseudonymity, which means that your identity in the blockchain is represented by a public address, which is usually a long series of alphanumeric characters. This is possible because public blockchains do not have permissions. You do not need to provide your personal information to use the blockchain, and you do not need to set a username and password.
However, your pseudonymous address in the block chain can still be linked to your real identity in various ways. One of the most common methods is the “KYC” or “Know your Customer” procedure, implemented on cryptocurrency exchanges and other cryptographic companies that operate centrally.
In fact, local authorities almost always require these companies to collect a large amount of information from you when you try to open an account. And as soon as you transfer your assets from an account with a centralized service to your cryptocurrency wallet, any outsider will have a good reason to believe that they can link your identity to this address. Especially if you transfer assets to this address from accounts in several centralized companies that require KYC.
Now let’s separate the facts from the fiction.
You can often hear that people call the blockchain technology anonymous. This means that users could (if this were true) make transactions on the blockchain without anyone tracking the movement of their assets. And yet, no one could identify the user. But this is far from the case for most cryptocurrencies.
For example, the blockchain analytics company CipherTrace claims to have developed “the world’s first Monero tracking system”. Moreover, it should be taken into account the fact that Monero is the most famous cryptocurrency that can claim a certain level of true anonymity. If CipherTrace’s statement is true, then who knows if there is complete privacy in blockchains at all.
CipherTrace: pushing back the veil of mystery
CipherTrace positions itself as “the world’s first team of blockchain experts” and lists its company’s missions as follows:
- Protection of financial institutions from the risks of laundering virtual assets and threats associated with cryptocurrency.
- The growth of the blockchain economy, making it safe for users and enjoying the trust of the state.
Since its foundation in 2015, the company has demonstrated rapid growth, and currently serves about 150 clients, including various state regulatory and law enforcement agencies.
It is probably not surprising that there are a large number of organizations that are willing to pay CipherTrace for its services. After all, many governments around the world are still distrustful of cryptocurrency and blockchain. And this sector is rife with hacks that cost billions of dollars.
On top of that, financial institutions in the US and other countries are usually subject to anti-money laundering or “AML” requirements to meet the requirements of their local regulators. From a layman’s point of view, AML enforcement means that banks, exchanges, and other financial institutions must follow a prescribed set of actions to detect and prevent things like money laundering, terrorist financing, and market manipulation.
The pseudonymous nature of blockchain transactions undermines the ability of companies to follow anti-money laundering guidelines. AML, and to a large extent, is driven by the desire of these companies to force CipherTrace to lift the veil of secrecy surrounding the identity of blockchain users.
The method behind the madness
In addition to identifying centralized companies that officials can go to court to obtain KYC information, there are many other methods that CipherTrace can and uses to identify pseudonymous blockchain users:
- IP address correlation
This method allows researchers to analyze web traffic to try to identify the user’s IP address so that personal information can be associated with the address in the block chain.
- Geo-identification
Your phone or computer often sends your location to websites as part of the normal web browsing procedure, and websites do not always have to ask for your permission before accessing them. Your location can be linked to other identifiers to help researchers confirm your identity.
- Pattern analysis
This method is designed to help researchers identify users based on behavior that is typical for both traditional transactions and blockchain transactions. For example, if someone buys a rare coffee blend from another country on their credit card, and then uses their cryptocurrency wallet again, researchers can use this template to identify the person.
Your blockchain is not private
Cryptocurrency and blockchain offer many advantages, but, unfortunately, real privacy in most cases is not one of them. For better or worse, corporations and governments have a high probability that they will be able to track your behavior in both traditional and cryptocurrency markets. And companies like CipherTrace and its competitors will continue to make progress in demystifying the blockchain in the coming years.
If we go even further, the entire fourth industrial revolution is based on blockchain. We will be able to talk about what fruits we will have to reap from using the blockchain only when the purpose of its use becomes clear.