Bitcoin’s Failures: How Lack of Anonymity Hurts the Future of Bitcoin
It’s crucial to discuss anonymity if we want to protect the future and widespread adoption of Bitcoin.
The recent rise in Bitcoin’s value has brought with it a renewed interest in the cryptocurrency market. However, many of Bitcoin’s flaws still need addressing as people scramble to invest their money before the bubble bursts. One such flaw is its anonymity and security. The Blockchain ledger system that tracks all transactions can be viewed by anyone on the internet, meaning your personal information is at risk for hackers or other malicious actors to steal from you if you’re using bitcoin for daily purchases like groceries or gas.
Below, we’ll take a look at the anonymity problem further.
Why does Bitcoin have an anonymity problem?
The bitcoin blockchain is a public ledger that records all bitcoin transactions. Researchers have been able to use the data stored in this ledger and cross-reference it with other sources of information to discover the identities of many people who use bitcoin. Bitcoin uses a form of cryptography called public-key cryptography, which has two keys, one public (which is shared) and one private (which should not be revealed). The public key is what your recipient needs to know for them to send you money. Once they send you money, they also show the matching private key so that you can spend it later. So if someone reveals their public key, they are essentially handing over the matching private key as well. This means anyone who knows your public key can see all the transactions you have ever made and who with.
In other words, anyone can get information about your identity if they have your public key. But they still cannot spend the money without also knowing your private key. And keeping your private key secure is the responsibility of the person who owns the bitcoin.
The problem is that when you spend your bitcoins for goods or services, they are no longer anonymous because now merchants can correlate your identity with whatever transactions were made using those coins. But this doesn’t just happen on a big scale; it’s also possible to link identities and transactional activity through transaction fees and timestamps, and many people have done this to identify individuals who would otherwise want their identity hidden. Therefore, a solution must exist from the point of spending.
What is a multi-signature wallet, and how do I use it?
A multi-signature wallet is a Bitcoin address that requires more than one private key to authorize the transaction. The keys are usually generated at different times and by various devices, so the keys will be held in two or three places, with no one person able to access them all.
The use of these wallets has been growing recently to provide more security for their Bitcoin.
The idea is that if one of the private keys becomes compromised, then no individual- or company-, has access to all three and can thus steal your bitcoins. And because multi-signature wallets require two out of three signatures to authorize transactions, you have an extra layer of protection if one of your keys is lost or compromised.
It’s important to note that multi-signature wallets are still susceptible to hacking. Hence, while they are a step up from using no protection at all, it’s not the best idea to store large amounts of money in them until their security has been proven over time.
What is Electrum?
Electrum is a software wallet that enables you to send and receive Bitcoins without worrying about your computer security. It runs on Windows, Mac OS X, Linux.
People use Electrum because it’s easy to install and connect into the Bitcoin network with a standard internet connection while also having the added protection of encrypting private keys so they can’t be stolen by malware.
The downside to Electrum is that it doesn’t have the same protections against getting hacked as a hardware wallet such as Trezor or Ledger, which stores your private keys in an external device rather than on your computer where they are more vulnerable to attacks.
Electrum does allow for two-factor authentication, though, so if someone has access to your email account and password, they will still need a code sent to their mobile phone before accessing your wallet on the Electrum service.
There are many wallet services available to the public, and Electrum is just one of them. Some wallets that exist include Edge (mobile app, formerly AirBitz), BitGo (multi-signature), Blockchain Wallet (online service), and GreenAddress/Greenbits(which enable you to spend bitcoins without having to wait for confirmation). Of course, that helps buff security, but what about anonymity?
What else can I do to remain anonymous while using Bitcoin online?
One way to remain anonymous online is by using a web browser called Tor, which was initially developed to protect government communications.
Tor routes internet traffic through three servers so that people browsing can’t trace your IP address and other information about you. The downside is that it’s significantly slower than regular browsing because of all the hopping around involved, and it can also be challenging to configure.
Another way is by using a platform like Changelly, which allows you to swap one cryptocurrency for another without your personal information. This means that even if someone finds out the address of where you want to send bitcoins (for example), they won’t know who owns them. There is a fee, though, of course.
Another option is to use Bitcoin’s built-in anonymity protection called “coin mixing.” It works by swapping your bitcoins with other users so you can’t be traced as an individual who sent or received the money. The downside here is that there could be people involved in criminal activities, and thus it would put your bitcoins in the hands of people who could use them for illegal deeds.
Another solution is to use cash instead (how barbaric), which will protect your anonymity with no extra effort on your part; the downside here is that while it does hide you from being identified digitally, there’s nothing stopping someone else from taking the money right out of your hands.
It looks like there’s a lot of work to do on the anonymity and security front for Bitcoin. So, what’s on the horizon?
What are some future projects to increase security and anonymity while using Bitcoin?
One project is called “The Dandelion Protocol,” which aims to make transactions with Bitcoin more secure. It does this by proposing a new way for nodes in the network to send messages so that they can’t be traced, but it also keeps them from collecting information about where you are sending bitcoins and who you’re receiving them from.
Another project is called “Torcoin,” which aims to improve security and anonymity by using the Tor network. It’s a coin with a blockchain, but it allows users to remain anonymous as they don’t need an ID or other identifying information to receive coins. Of course, this means there could be some criminal activity such as money laundering or terrorist financing, but it does protect people from being identified.
Another project is called “Dandelion++,” which aims to make transactions more secure by altering the way nodes relay messages; in this case, though, they can’t contact other nodes anonymously, so there’s still some traceability to them- at least for now.
Conclusion
The main takeaways are that anonymity is necessary for the future of cryptocurrencies to grow and not be hindered by bad actors, while anonymity can have drawbacks.
Privacy needs to be a priority to protect people’s identities from being exposed and ensure their transactions remain secure; this means adding extra security measures like Tor or coin mixing while also looking into anonymity-focused projects like Dandelion Protocol and Torcoin.
Bitcoin’s anonymity might not be perfect, but there are some solutions to make it more secure, which is necessary for cryptocurrencies to gain trust with the community.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
