May 26, 2024

The importance of anonymous cryptocurrencies

Recently I was part of a collaboration on Mixcoin, a set of proposals for improving Bitcoin’s anonymity. A natural question to ask is: why do this research? Before I address that, an even more basic question is whether or not Bitcoin is already anonymous. You may have seen back-and-forth arguments on this question. So which is it?

An analogy with Internet anonymity is useful. The Bitcoin protocol doesn’t require users to provide identities, just like the Internet Protocol doesn’t. This is what people usually mean when they say Bitcoin is anonymous. But that statement by itself tells us little. A meaningful answer cannot be found at the protocol level, but by analyzing the ecosystem of services that develop around the protocol. [*]

Continuing the analogy, the meme in the early 90s was, “on the Internet, nobody knows you’re a dog.” But that changed quickly once e-commerce and advertising began to provide an incentive for pervasive tracking and data mining. Bitcoin anonymity today is where Internet and web anonymity was in the 90s — a variety of research papers have shown how users’ pseudonymous Bitcoin addresses can be linked to each other and potentially to their real-world identities, but it remains to be seen if linking/tracking services will develop and flourish. It would be entirely unsurprising if they did.

This is where the public nature of the block chain becomes salient: in a hypothetical world where Bitcoin is commonly used for everyday transactions and deanonymization happens as a matter of course, users will have much less privacy than with cash or credit cards. At least in today’s world your transactions are only exposed to merchants, banks, and any intermediaries, whereas we’re talking about a scenario where they’d be exposed publicly, permanently, and irreversibly.

I see research on anonymity technologies for cryptocurrencies as a hedge against this possibility. Having at least an existence proof of stronger privacy technologies for Bitcoin — whether Altcoins or mixing-based — is important for driving confidence in mainstream adoption of Bitcoin. To what extent these technologies should be deployed today is a question best left for another post.

[*] Reaching conclusions about the Bitcoin ecosystem by looking at the Bitcoin protocol seems to be a recurring fallacy: see my previous post The low-transaction-fee argument for Bitcoin is silly.


  1. Embed kiddie porn or copyrighted material into the block chain and watch the chaos.

  2. Tom Woods says

    There is an entity with connections in Panama that I wish I could identify because they defrauded me of my bitcoins by posing as a different web vendor. Identification might not always be such a terrible thing.

    • Mitch Golden says

      Indeed – the entire premise of bitcoin has the whole thing backwards. You don’t generally want to be anonymous from the people with which you’re transacting. As you note, you generally want to do business only with those with good reputations. You *might* want to be untracable by the government or other entities. This is exactly how cash works. You know the person you are buying from or selling to, but once you hand him or her the cash, it’s generally not easy for the goverment or “big data” to track the transaction. With bitcoin it’s the other way around – anonymous from the person you want to know about but trackable by the authorities.

    • Identification is an economic problem. If you put a $10m bounty, I think you would find them, as well as.tracing the block chain or other methods. But that is the reason government will spend many times the value of single losses. Theft and fraud can be profitable if the cost of prevention or restitution exceeds the value stolen.

  3. Mitch Golden says

    The statement here is too weak – bitcoin now is not like the internet in the 1990s. Because of the structure of bitcoin, it will be virtually impossible for users to be anonymous, even today. A law enforcement agency will be able to directly de-anonymise most of the users of the bitcoin network (and it is reasonable to presume that they are already doing so). This the can do by looking at where items are shipped, or what (non-bitcoin) accounts money is going into and out of, etc.

    Then, by looking at the block chain it will be possible to identify the real-world parties with which an “anonymous” user is transacting. From this, just look at Facebook/LinkedIn/phone-call networks and it should be pretty easy to pick out the user. And of course if you ever slip up, you’re identified permanently.

    Bitcoin is, so far, a non-solution to any problem I can think of. It seems to be little more than some sort of anarcho-capitalist wet dream.

    More importantly, I still can’t tell why anyone thinks they should even hold value, but that is an economic question, not a technical one. See