• The Best Kept Secret in Crypto

    Anonymity is not the same as obfuscation

    Cryptocurrencies have generated a lot of excitement over the last year or so, especially with the phenomenal price surges experienced in 2017. The ability to conduct peer-to-peer transactions through the blockchain has an added attraction. It cuts out government intervention and the role of third parties such as banks and financial institutions.

    However, apart from all the current hype around digital currencies, there is one major misperception about this market; most people believe that cryptocurrency transactions are fundamentally anonymous. Nothing could be further from the truth and, apart from a handful of the hundreds of cryptocurrencies on the market, most of them do not provide anonymity.

    The danger here is that most people entering this market do not understand the core technology. We get carried away on the wave of hype without checking our facts, making us vulnerable to misinformation spread by currency traders.

    How Much Can We Hide?

    Blockchain, the platform for cryptocurrency exchange, is antithetical to anonymity because it is designed to be fundamentally transparent.  The intention is to make all transactions available for public scrutiny while protecting our privacy. However, this doesn’t mean that they are anonymous; at best most cryptocurrencies integrate a level of obfuscation to obscure the origin of transactions and make them harder to follow.

    Blockchain technology uses ledgers with public addresses to facilitate transactions, which are encrypted 34-bit alphanumeric strings recorded on the blockchain. This technology gives us a false sense of security.

    Source: Cointelegraph. https://cointelegraph.com/news/blockchain-transaction-anonymity-is-necessary-evil

    Hiding identity on digital networks can be difficult and we often leave digital footprints in our transactions. Even though cryptocurrency transactions do not link directly to a person’s identity, physical address or email, this information can be tracked through IP addresses. Our identity can also be traced if we use a private Wi-Fi connection

    Bitcoin: A Case in Point

    Bitcoin transactions are not anonymous and can be tracked, even though blockchain encryption enables a level of obfuscation to provide some degree of financial privacy. The Bitcoin infrastructure is designed around a distributed, global database which stores every single transaction that takes place in the system.

    We can use Bitcoin software to create a new public key, using it as a pseudonym to transact without registering personal information. The problem is that pseudonymity does not mean anonymity, and our identities can still be tracked.

    Bitcoin’s answer to this problem is to use a number of obfuscation techniques to enhance financial privacy. One of these is referred to as “ambiguating obfuscation” which reduces the amount of information that a person can gather from a transaction. This could involve the use of a new pseudonym for every transaction.

    Another type of obfuscation, “cooperative obfuscation”, has become popular with users to fudge the origin of transactions. This can be done by mixing funds with other users through a service provider to obfuscate the flow of payments.


    Source: Zcoin. https://zcoin.io/the-difference-between-privacy-on-the-blockchain-and-hiding-your-ip-address/


    Other cryptocurrencies, or altcoins, have built stronger platforms in terms of privacy. As the original cryptocurrency, Bitcoin had to field much of the criticism by government of blockchain’s potential use by criminal elements for nefarious financial transactions. As a result, Bitcoin has opted to strike a balance on privacy levels to avoid a government crackdown.

    Bucking the Trend

    While many people don’t see anonymity as a big deal, others value their financial privacy. To cater to the privacy conscious, there are several cryptocurrencies that focus on providing an enhanced level of anonymity:

    • Monero. This cryptocurrency was launched in 2014 as a fork of ByteCoin and provides one of the highest levels of privacy in this market. While it uses the same basic transactional framework as Bitcoin, Monero uses ring signatures and address derivation to increase anonymity.

    Ring signatures obfuscate all the details of transactions, including origins, destinations and transaction amounts. Every transaction is signed and time-stamped with a ring signature, which is verified against a group of public keys while protecting the identity of the actual private key used in the transaction. This means that Monero blockchain transactions cannot be linked to a specific user.

    • Zcash. Zcash is an open-source cryptocurrency launched in 2016. While payments on the public blockchain are published, the sender, recipient and transaction amount remain private.

    Zcash uses zero-knowledge proofs, built on advanced cryptographic techniques, to verify transactional validity without revealing key information. This enables the network to maintain a secure ledger without revealing parties or amounts involved in the transaction.

    • Verge. Verge is another open-source digital currency that models itself on Bitcoin. However, Verge uses multiple anonymity-centric networks to keep IP addresses obfuscated and ensure the privacy of transactions.
    • Dash. This cryptocurrency model offers a decentralized mixing service, called PrivateSend, that enables the merging of funds. Funds and payments are mixed together on this platform so that an investigator cannot detect the sender, destination of amount.

    Nefarious Bitcoin Dealings

    Of course, there have been ventures in the cryptocurrency space that have almost ruined its reputation. Who can forget the notorious Silk Road bust? This was an online marketplace for drugs and Bitcoin was its lifeblood. It was shut down by the U.S. Justice Department in 2013, and its creator, Ross Ulbricht, was jailed for life. In 2017, the department claimed the proceeds from the sale of 144,336 Bitcoins, valued at over $48 million.

    In more recent times, Floridian, Anthony Murgio, was sentenced to five and half years for operating a Bitcoin exchange connected to hackers. This was used to launder more than $10 million worth of funds. In addition to these cases, illegal operations involving Bitcoin have been detected in other parts of the world, including Russia and Malaysia.

    So What’s the Big Deal About Anonymity?

    Although we can understand the need some people have for financial privacy, for the majority of users in the cryptocurrency space anonymity is not such a big deal. Well, it’s not their overriding consideration when choosing a cryptocurrency. Can you think of any non-nefarious uses that demand anonymity?

    Whether you’re particular about anonymity or not, please, please, please, before you invest in a digital asset, I implore you to check some of your core assumptions about how it works. Digital currencies are very exciting, and many of us believe that this is just the beginning of something really special. That’s all the more reason to be judicious, thoughtful and measured when making investments in this space.



    Emma Avon, Coincodex, 2017. https://coincodex.com/article/66/top-5-cryptocurrencies-for-anonymity/

    Sudhir Khatwani, Coinsutra, 2018. https://coinsutra.com/anonymous-bitcoin-transactions/

    Rishav Chatterjee, ResearchGate, 2017. https://www.researchgate.net/publication/320755472_Anonymity_and_the_Obfuscation_Issues_in_the_Cryptographic_Currency_Bitcoin

    Masterthecrypto. https://masterthecrypto.com/privacy-coins-anonymous-cryptocurrencies/

    Reuben Yap, Zcoin, 2017. https://zcoin.io/the-difference-between-privacy-on-the-blockchain-and-hiding-your-ip-address/

    J P Buntinx, Digital Money Times, 2014. http://digitalmoneytimes.com/cryptocurrency-open-ledger-vs-anonymity-obfuscation/

    Andrew Norry, Blockonomi, 2017. https://blockonomi.com/history-of-silk-road/

    Benjamin Vitaris, Bitcoin Magazine, 2017. https://bitcoinmagazine.com/articles/operator-illegal-bitcoin-exchange-coinmx-sentenced-prison/


  • When Are We Going to Learn?

    Cryptocurrency is supposed to be decentralized

    Getting it all wrong

    When Satoshi first wrote the Bitcoin whitepaper in 2008, she challenged the banking system as we know it.  She draws reference to the inherent weaknesses of the trust-based model.  The whole point was to build an ecosystem and economy that operated without these trusted third-parties. Yet, here we are, 10 years later, bastardizing that vision with gusto.

    The dichotomy in our response, as a community, is quite curious.  On one hand, we seem to understand these are really big ideas that have the potential to change banking and retail as we know it.  This explains the total market cap of crypto being about $425 billion as of Feb 25, 2018.  Yet, on the other hand, it appears as though a supermajority of digital currency users now use centralized exchanges like Poloniex, Coinbase, Bitfinex, Bitstamp, etc.

    Our collective lack of technical depth coupled with growing interest in the space has led many crypto enthusiasts to these trusted third parties.  Further, cash is still king in business, and these folks have made a lot of cash.  And, smartly, they’ve reinvested it in the form of massive marketing budgets.  Bitfinex is the trusted third-party to about 60,000 BTC worth of cryptocurrency trade daily. GDAX and Bitstamp, follow close with about 22,000 BTC and 16,500 BTC worth of crypto trade daily, while Kraken and HiBTC facilitate about 5,800 BTC and 5,200 BTC worth of crypto trading daily (chart above).

    We’re not actually better for it

    Perhaps the most ironic thing about digital currencies is that our misguided use of these centralized approaches does not actually result in that great of a user experience, as evidenced by:

    1. A hugely significant amount of money that has been stolen from centralized exchanges.  (More on this below.)
    2. Some exchanges experiencing massive slowdowns during peak times.  (Some caused, at least in-part, by congestion in the underlying networks of Bitcoin and Ethereum.)
    3. High trading volumes, or not being able to keep up with growth, leading to downtime on major exchanges.

    The reason not to rely on trusted third-parties is that of all the ways in which our reliance on them can hurt us.  Yet, here we are, getting hurt.  It’s almost as if today’s users of digital currencies would be perfect posterchildren for Satoshi’s 2008 whitepaper.

    The notion of privacy in crypto has also largely been a broken dream.  And that’s at the protocol level.  It does not even take into account how much we’ve made things worse with our centralized pattern of adoption.  Coinbase being subpoenaed for the personal information of 14,355 holders by the IRS only adds insult to injury in this respect.

    Centralization from the get-go?

    ICOs are centralized too!  In almost every case, those investing in an ICO are all buying from a central company or organization that they seemingly trust.  This is a far cry from the way Bitcoin was originally built and launched into the community.  First, we had a whitepaper.  Next, we had working software.  Finally, we had the creation of value.  No one bought bitcoin from Satoshi LLC after she posted the whitepaper online for the first time.

    Bitcoin was launched in a pure way, with people organically growing the network on proven technology before ascribing value to it.  Yet, here we are, investing in ICO after ICO, many of which have no technological progress-to-date.  We’re not banking on a community or a network at these early decision points, but instead a central organization with an idea.  The all-time cumulative ICO funding total stood at $8.74 billion according to CoinDesk as of February 19, 2018, with Telegram ($850 million), Filecoin ($262 million), and Tezos ($232 million) being the largest fundraisers.

    2017 alone witnessed 342 ICOs raising about $5.4 million. The year 2018 has already seen 92 ICOs till date, with $3.1 million being raised. So, just two months into the year and we’re already recorded 57% of 2017’s total raise.

    How much pain is too much?

    Apparently, the cost of trusting these third-parties is significant.  Billions of dollars have been stolen from exchanges since Bitcoin launched in 2009 with almost zero accountability on the part of the exchange in nearly every instance. Here’s a quick view of what centralization has cost the cryptocurrency community since its inception:

    When using the total market cap as a denominator, it appears that we are less safe with crypto than we were with old-fashioned money.  Perhaps that shouldn’t be surprising, given that our collective behavior since this revolution started has been antithetical to its premise.

    Where do we go from here?

    I’m left wondering why.  Why would we all believe in this game-changing vision with such fervor, and then proceed not to operate by its ethos?  Maybe decentralization isn’t the killer feature of these technologies, after all.  Maybe it is, and the community does not value it enough to actually use it.  Maybe we just don’t like to practice what we preach.  While those would be easy answers, they ring hollow to me.  

    Perhaps it’s that the usability of these decentralized technologies … leaves a lot to be desired.  Let’s face it, blockchain is pretty unapproachable.  Especially to folks who do not count themselves in the technical elite.  Whether we’re talking about cold storage of your private keys or the fact that you are sending money to a 34-character alphanumeric string that you better not mistype, lest you lose your money.  

    So maybe, just maybe, there’s hope.  Maybe we understand that decentralization is actually important.   And, we’re just waiting for the usability of fundamentally decentralized approaches to actually get better.  And, when it does, we will better align our actions with our beliefs.  The alternative is a lot worse: our behavior is simply based on a fundamental misunderstanding of these technologies and their value.  This would dangerous for all of us that believe in this technology and want it to win.  So I, for one, am holding out hope that it’s the usability.  


    1. Cryptocurrency market capitalization data as available on CoinMarketCap.com
    2. ICO data from CoinDesk’s ICO Tracker <https://www.coindesk.com/ico-tracker/>
    3. Cryptocurrency exchange average trading volume data from Bitcoinity.org <https://data.bitcoinity.org/markets/exchanges/USD/6m#rank_desc>
    4. Andrea Tan and Yuji Nakamura, 2018, Bloomberg L.P. <https://www.bloomberg.com/news/articles/2018-01-29/cryptocurrency-markets-are-juicy-targets-for-hackers-timeline>
    5. Cheang Ming, 2018, CNBC <https://www.cnbc.com/2018/01/28/coincheck-nem-hack-unlikely-last-for-cryptocurrency-space-analyst.html>
    6. Frank Chaparro, 2017, Business Insider <https://www.businessinsider.in/Some-of-the-biggest-crypto-exchanges-are-shutting-out-new-users-because-they-cant-keep-up-with-demand/articleshow/62272509.cms>