We tell you what confines Bitcoin confidentiality and why there is nothing wrong with that.
The desire to approach bitcoin and blockchain with a healthy dose of skepticism and moderation, especially at the beginning of a cryptocurrency journey, is perfectly understandable. The concept of trustless work is difficult to understand, and we are dealing with technology that requires users to have absolute faith in its trustless device. It was much more difficult to achieve this at the dawn of the emergence of Bitcoin, because the society was dominated by the belief that, by its very nature, Bitcoin is completely anonymous and suitable only for black markets and criminals.
In 2012, the FBI's report titled “Bitcoin Virtual Currency: Unique Features makes it much more difficult to fight illegal activities” leaked to the media. This is a vivid example of how bitcoin law enforcement agencies saw at that time. The report expresses concern about the anonymity of Bitcoin and the fact that the cryptocurrency "will naturally attract traffickers, terrorists, criminals and facilitate money laundering."
The FBI easily identified possible uses for cryptocurrencies (mostly illegal), but noted that it could not be called untraceable, and referred to the corresponding study by University College Dublin.
Around the same time, people who are not among the direct developers and fanatics of cryptocurrency, began to realize that Bitcoin is not as anonymous as it should be.
Bitcoin creator Satoshi Nakomoto never considered cryptocurrency anonymous and untraceable. In his White Paper, the word "anonymous" applies only to public keys. In particular, Nakamoto writes:
“Confidentiality can be maintained by disrupting the flow of information elsewhere: by keeping anonymous public keys.”
In other words, Bitcoin confidentiality is limited by the anonymity of public keys acting as pseudonyms for each end user.
Pseudonymity and anonymity are related concepts, but the difference between them is great. Anonymity means the inability to establish the true identity of a person or group. Pseudonymity is more associated with the use of a fictitious name that hides a person.
For example, Samuel Clemens used the pseudonym "Mark Twain" to keep his real name secret. Clemens hid behind a pseudonym, but it cannot be called anonymous, since Mark Twain became widely known in society and remained in culture after the real name and surname of the writer were established.
As in the case of Samuel Clemens, each public key becomes our own pseudonym. We can hide behind them, but the truth is that Bitcoin was not designed with anonymity and confidentiality concerns.
Hiding behind a pseudonym is not easy
In the brief history of Bitcoin, there were enough examples that demonstrate the disadvantages of using public keys as aliases and the difficulties that users have encountered in trying to preserve anonymity. The story of Ross Ulbricht and the Silk Road site is an excellent example of Bitcoin's limited privacy.
Ross Ulbricht, known online as Dread Pirate Roberts, organized the famous black internet market. From the very beginning, in an effort to circumvent traditional financial channels, the site accepted payments exclusively in bitcoins. They were ideal for Silk Road users, as many of them had limited access to financial services. The peer-to-peer cryptocurrency format was perfectly combined with the crypto-anarchist atmosphere of the site. Ironically, it was Bitcoin and the blockchain that played the main role in capturing and condemning Ulbricht.
The FBI used bitcoin blockchainto bind transactions to previously captured servers. More than 3500 transactions were found in the public registry between the servers and Ulbricht's personal laptop seized by the bureau.
In this case, Bitcoin anonymity ended when the FBI managed to match the public keys with a specific person. Ulbricht's pseudonym was his public keys, each of which was associated with a specific transaction history.
How to ensure anonymity?
Increasingly, the question arises, why do we need anonymous cryptocurrencies? It is based on reasoning about why we, as individuals, strive to protect personal data and need confidentiality, although many of us have nothing to hide.
Confidentiality is a funny thing in the sense that it is not always clear why a person needs it, who does not do anything wrong and does not violate the law. But for society as a whole, confidentiality is a very valuable resource, and that is why its advantages for a particular person can be difficult to notice. You can draw an analogy with the roads: an individual citizen may not need a road for a thousand kilometers, but society as a whole benefits from a developed transport infrastructure.
Such behavior, when some members of the group act in their own interests, even if they contradict the common good, is called “the tragedy of the communities”. This social phenomenon largely explains why it is so difficult to foster confidentiality at the individual level.
Confidentiality is a “national” resource that benefits all when each individual contributes to its support. Why do we need anonymity? If you cannot answer this question (and, therefore, do not maintain proper confidentiality), then you yourself are part of the problem, part of the tragedy of the communities.