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.