Have you ever wondered if blockchains can be anonymous, or what degree of anonymity actually exists? The answer is not simple and in this article we’ll discuss blockchain’s take on decentralization and the layers of anonymity.
While blockchains claim to be completely anonymous, we suggest that this is not entirely true. Blockchains are decentralized, scalable and they also offer privacy to its users. The question that arises though is how anonymous can users really be on a blockchain?
Blockchains are scalable and encrypted cryptographically in a way that data or transactions cannot be traced back to its users. In a permissioned blockchain, if the consensus mechanism involving proof is not used, then it is possible to execute smart contracts on the blockchain without handing over any data, therefore, private/permissioned blockchains can be completely anonymous in nature.
The anonymity of a blockchain network depends on the cryptographic algorithm being used for setting up the network itself. In certain blockchain networks like Monero and DASH, anonymity is key, however, in cases like Bitcoin, the network is not anonymous because it involves Proof of Work algorithms which results in the use of pseudonymous. In such blockchains, a user needs to keep the private key safe as that is the only way to prove one’s identity. Additionally, transactions can only be tracked back to the public key.
Despite this, there are measures that can be undertaken to maintain anonymity and privacy, like frequently changing one’s wallet address. This makes it difficult to track back a specific transactions to one user.
Anonymity in Private Blockchains
In a private blockchain, the company can decide to keep a certain degree of anonymity based on the objective that they are trying to achieve via the establishment of said enterprise.
Bitcoin is often described as anonymous because it’s possible to send and receive bitcoins without revealing any personal information. Reasonable anonymity with Bitcoin can be quite complicated, but perfect anonymity may be impossible.
In the original whitepaper, it was recommended that Bitcoin users use a new address for each transaction to avoid the transactions being linked to a common owner. This would be the equivalent of writing many books under different pseudonyms. Although this remains a best practice, it is not enough to guarantee full anonymity due to multi-input transactions. One way to increase your anonymity is to use multiple wallets. This is like maintaining multiple individual identities.
There are many exchanges that allow users to generate a different wallet address for each transaction and this recommended measure ensures their anonymity.
Making Anonymous Bitcoin Transactions
Though Bitcoin is not anonymous by design, it can ensure a user’s privacy if it is used as discussed above. Cryptocurrencies like Monero and Dash focus on anonymity, and is often a user’s first choice, giving tough competition to Bitcoin at the protocol level.
Cryptocurrencies are maturing every day and it can be debated if anonymity will become a common feature, especially in the shadow of government oversight, but for the time being, it is possible to remain anonymous if you’re careful.
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