Dealing with the cryptocurrencies, security and privacy are considered to be the most important issues. Normally, it is portrayed in front of the new customers that trading cryptocurrencies is totally a private matter. However, the customers are still eager to understand the security mechanism that is related with the cryptocurrencies. Due to the increasing awareness, the users now want to have the complete control over their assets and funds.
Here is a complete guide that will explain the readers the security mechanism of the Bitcoin and the validity in the claims of making blockchain private by the developers.
Is Bitcoin Anonymity a Myth?
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As the record of the Bitcoin wallet are open for anyone and can easily be viewed, no one can trace out the information of the real owner. To own a Bitcoin wallet, one does not have to necessarily prove his identity as it does not implement the Know Your Customer policy. However, this policy is implemented if the wallet owner carries out any kind of transaction.
This means if the Bitcoin wallet is just owned by anyone, he is anonymous but as soon as anyone send any funds to it or the owner tries to send funds to anyone, the anonymity of the owner is eliminated. The governing bodies trace out the criminals or hackers using the information available over the blockchain network.
Can Bitcoin be Traced?
As the Bitcoin transactions can easily be traced using the blockchain network, conducting the Bitcoin transactions in an anonymous way is becoming nearly impossible. Viewing the Bitcoin blockchain, the complete activity of Bitcoin transaction can be chalked out. This means that the Bitcoin transactions can be traced easily. This is only possible due to the transparent nature of the Bitcoin blockchain.
Similar to the Bitcoin, the transaction of cryptocurrencies such as Ether and Solana can also be traced by using their respective blockchain explorers. One can find out all the necessary credentials regarding any transaction including the amount of funds sent or the details of the receiver to whom they were sent. However, many users are still of the view that they can still carry out anonymous Bitcoin transactions.
All the countries in the world have now declared the KYC (Know Your Customer) policy mandatory. According to this policy, at any centralized platform, it is necessary for the customer to show their identity before carrying out any trade process. This makes it feasible for the higher authorities to keep a check over the transaction going on everywhere and to check the funds in any citizen’s wallet.
One has to provide his personal credentials to the platform before trading over any central exchange. The Bitcoin addresses and personal details of the users are integrated with each other. Anyone can go through any of the transaction carried out in past as the history of transactions is never deleted.
Why are Bitcoins Traceable?
As all the transactions occurring are recorded on the blockchain and being a transparent system, the Bitcoin transactions can easily be traced. A number of developers are working since past years to find out the way that if the crypto transactions could be made anonymous. But as we know that the blockchain network is accessible to everyone easily, therefore anyone can trace out the direction of the money flow.
One just need to have the wallet identity and can easily check out any transaction that occurred in the past and all that will occur in the future. The details of the transactions are also revealed through wallet identity easily.
How are Bitcoins Traceable?
As mentioned before, any transaction can be traced by just knowing the wallet identity. Therefore, the higher authorities can easily get their hands over any scammer or cybercriminal by just getting the access to his Bitcoin wallet identity.
Using this technique in the past years, a number of fraudulent acts have been trapped by the governments of various countries. Though the criminals also have become advanced in technological techniques and try to stay as anonymous as they can be but still, they get caught in the trap due to the transparency of Bitcoin blockchain. In tracing out any transaction time could be consumed in finding the wallet identity.
How is Blockchain Transparency Good for Security of Cryptocurrency?
Decentralization of the currency was the main reason that Bitcoin and other cryptocurrency came into being. Decentralization hands back the control of any asset to the real stakeholders instead of any higher authorities set as a watchdog over it. it gives the right of possession to all the actual stakeholders.
This is the same method as democracy works in the world. It gives the ordinary users the control over their funds eliminating the hold of a single authority. Similarly, Bitcoin is also not owned by any single governing body. No single authority can claim over being the owner of the authority and stop any other entity from accessing it. Not looked after by a central authority also creates the confusion regarding security and regulation in the minds of the users.
Blockchain is designed in away where the miners get rewards for their computing abilities and earn profit. As the blockchain can be easily accessed by anyone using the internet facility, anyone can verify the claims of the miners before trusting them to be true.
Can the Address of the Bitcoin Wallet be Searched?
A Bitcoin explorer can be used to trace out an address of any Bitcoin wallet. But it is not necessary that one will also get to know the identity too if he gets his hands over the address. Searching for the wallet only gets difficult when one cannot find out the identity. The blockchain explorer only facilitates in finding the address and the transactions that occurred but not the identity, that could be challenging to find.
This is the reason that the address of the Bitcoin wallet is called as pseudonym, that does not match the actual name of the user. Pseudonyms are easier to be traced comparatively.
Challenges Faced in Tracing Bitcoin Address
Tracing anyone’s Bitcoin address can be challenging and time consuming if the user owns a mixer or multiple number of wallets. This could slow down the search process for the authorities. Though it is impossible to carry out anonymous transactions but by using the cryptocurrency mixers, this could be made possible. Some of the challenges in tracing addresses are mentioned below.
- Bitcoin Mixer
For Bitcoin, the Bitcoin mixer ensures that the transactions could not be traced easily. It does so when in a pool a large number of transactions are mixed together that are carried out by different people. These transactions are then sent to the respective addresses given.
Limitations: But this also involves a risk to some extent. One should make sure that he carries out the mixing process with the help of the individuals he trusts. There is a great chance of losing or stealing of funds by others. The mixing process proves to be helpful in case of smaller transaction amounts but for greater transactions it becomes difficult.
- Smoke Screen
Another way to hide the transaction details is the creation of smoke screen. In case anyone does not want to reveal his Bitcoin blockchain activities, he can hide them by creating it. This makes it difficult to monitor the wallet details.
- Multiple Wallets
Moreover, one can also create a number of wallets and carry out multiple transaction across them that makes the tracing of a single transaction a little more difficult. One should carry out the transaction every time using a new wallet address. This helps in the isolation of the wallets and transactions from each other so that no one can find the association between them. This makes the tracing process difficult as no one can see other addresses owned by a person.
All these challenges can create hurdles in tracing an address and if applies all of them together, it can almost make it impossible to trace someone’s address.
Is it Possible to Own an Anonymous Bitcoin Wallet?
Yes, it is possible to own an anonymous Bitcoin wallet. But dealing with the anonymous wallets, one has to be a little more careful. One does not have to reveal the real identity accidently to anyone that is the main reason of creating the wallet.
But holding an anonymous wallet does not ensure anonymous transactions. In case someone has to make several transactions, the wallet is linked with an identity, revealing the personal credentials. Due to the strict guidelines all over the world and the KYC regulations imposed, it is not possible to carry out the transactions hiding your personal details completely.
However, there are some wallets that are anonymous such as the Electrum wallet. Before considering any wallet, one should look upon the fact that how will he transfer the Bitcoins into it. This is due to the reason when the funds are transferred through any exchange, the KYC policy is followed that already eliminates the chances of staying anonymous during a transaction.
Is it Ok to Share Bitcoin Address with Anyone?
There exists no problem in sharing the public key with anyone, but one should make sure that his private key remains a secret and cannot be found by anyone. Any third party can carry out the transactions using the public key as it is completely safe. No scam could be done using the public key and it is considered to be a convenient method to make any payment. Cryptocurrency could only be stolen if anyone gets his hands over the private keys of the user.
While dealing with the bitcoin wallet, the distinction among the public and private keys matters a lot. If we take the example of the email account, anyone access the other user utilizing his email address and send any email. This is how public key works. But the email could only be read by the owner of the email account by opening it using the password. This is the importance of the private key. Therefore, anyone can send funds using the public key and only the owner can access them using the private key.
To avoid any scam in future, the user should ensure to protect the wallet using a complex password. This password and private keys should be kept private at all costs unless the user trusts someone completely and only share the public key with others.
What are Privacy Coins?
Some of the private blockchains have decided not to reveal the personal credentials of their customers by making them stay private. They do not follow the policy of recording and tracing all the transactions and all the details related to it such as the amount of funds, the history of transactions or the address of the sender and the receiver.
Privacy coins are setting new benchmark in the cryptocurrency domain. Zcash is a private blockchain that branched out from the Bitcoin blockchain. It followed the fundamental rules of the traditional blockchain but also developed policies to maintain the privacy of their customers.
It used many of the advanced technologies such as zero knowledge proofs, stealth addresses or ring signatures to keep the privacy of the user’s wallet intact. Zero knowledge proof tells the person carrying out the transaction that the transaction has been held successfully but does not reveal any other additional information about it. This technology is being implemented in many multiple places in the blockchain network.
Some Popular Privacy Coins
To carry out anonymous transactions, some of the most popular privacy coins are Zcash (ZEC) and Monero (XMR). Below are explained their distinct features.
- Zcash (ZEC)
It is the subdivision of the Bitcoin blockchain network. Zcash provides the opportunity to its customers to hide the real identity of their transactions using the advanced technologies and techniques. It permits its users to carry out transactions without revealing the real credentials of the two parties to any external entity.
It uses the zero-knowledge proof technology to keep the credentials of the users safe. With the addition of an extra privacy layer, the proofs help in hiding the transaction details. This technology is becoming popular in the crypto ecosystem. It enables the users to transact in a transparent manner in addition to ensuring their privacy.
- Monero (XMR)
Monero is gradually becoming the leader of the private crypto world. This system is using the stealth addresses and ring structure to keep the privacy of the users intact. The mechanism of Ring Confidential Transaction helps in concealing the amount details of the transaction.
Monero is a private blockchain technology by default. It has been claimed by a number of other firms that they have got hold of the technology Monero is implementing but the blockchain technology has denied all these claims.
Cons of Using the Private Coins and Blockchains
There is always a risk associated with any transaction held, especially when dealing with cryptocurrency. The private coins ensure the anonymous nature to the users but there is always a risk associated. The decentralized finance protocol and Web3 have gained a lot of momentum in the past years.
The decentralized networks also came into being on the basis of the public blockchain. The public blockchain refrains from maintaining the privacy of the user’s credentials. The private coins and blockchain provides the privacy and safety of the customer’s information but then it fails in keeping up with the advanced techniques and technologies of the decentralized financial protocol.
It is a difficult job to maintain the privacy on the decentralized financial system as one has to recreate the whole system from scratch. There are a lot of complexities when it comes to the thought of integrating the decentralized financial protocol with the privacy requirements of the users. These problems may include training the users and developers, getting the issues related to scalability fixed and collecting and investing new funds.
Though facilitating a lot of developers already, the traditional decentralized finance still has a number of issues to cater. So, integrating it with the new revised blockchain system would create a number of more problems for the users. This will only facilitate the users in transferring the funds from one wallet to other, however other services such as stablecoins, borrowing, lending and other exchanges decentralized would still be a problem to cater.
The regulatory compliance requirements are also a major problem associated with the privacy coins. It becomes difficult for the private coins to verify that they are complaint or not as they carry out any transaction without revealing the personal credentials. So, hiding all the details still proving compliant is a complex task.
Therefore, without achieving the compliance, providing privacy opportunities to the customers becomes a complicated situation to handle.
Bitcoin and other cryptocurrencies are becoming popular among the people gradually. However, the notion connected to them that they are merely being utilized for cybercrimes is totally wrong. The transparent nature of the blockchain network has made it a lot easier to trace any scam activity making it impossible for anyone to carry out the Bitcoin transaction anonymously.
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