Is e-wallet use necessary to maintain privacy in Bitcoin use?

[amincd]

One consequence of the distributed nature of Bitcoin's transaction history is that all payments sent from one Bitcoin wallet can be linked to a single identity, so if your identity becomes known to be behind a single one of your transactions, then a lot could be uncovered about your other transactions, like how much you've spent (which could possibly give people a rough estimate of what your income is), and very likely who you've sent Bitcoin to.

These visualizations of bitcoin transactions demonstrate how traceable transactions are to a single identity:

http://anonymity-in-bitcoin.blogspot.com/2011/07/bitcoin-is-not-anonymous.html





This is obviously a big privacy problem. One way to over-come this is to use e-wallet services, which as Jon Matonis notes, eliminates the trace ability of Bitcoin transactions through the use of off-the-grid offsetting:

http://www.snell-pym.org.uk/archives/2011/05/12/bitcoin-security/#comments

Another possible route to protecting privacy is for an individual to have multiple Bitcoin wallets, and confine sensitive transactions that they don't want to be publicly known to a wallet which does not involve any transactions that are publicly linked to their identity. If a GUI is developed that allows for easy switching from using one wallet to another, this approach could become practical.

This is still not ideal though, as one can never ensure that their being party to a particular transaction won't become publicized, and therefore give away their involvement in all the other transactions conducted with the same wallet, so it seems like e-wallets are the only relatively secure way to protect one's identity.

Any ideas/thoughts on the matter? Are e-wallets the only practical way to protect one's privacy while using Bitcoins?

*Edit, added pictures

[westkybitcoins]

In sum: yeah, it seems like e-wallets, or some variant of public pooling of bitcoins (BitBills could probably work too) is the only way to ensure privacy... for most folks.

The only other option I can see is to mine solo, accumulate enough coins for all your needs, and never use any single 50BTC block for more than one transaction. (Yeah, that means dumping any change for small transactions.)

One could always create as many empty wallets as one likes to pass funds around, mimicking the involvement of other people, so you could claim the last transaction in a wallet wasn't you... but that seems harder to sell (plus there could always be a demand to know who the first "fake" wallet belonged to.)

[guywhogotgoxed]

One thing I dont get is...
... if an address (A) is linked to me, and I start up another client sending to a newly generated address (B), send the coins there, and then go on to some online wallet and back and forth...

How can anyone prove I am the owner of address B and so on? I might just have bought a bunch of digital goods with it, or given it away for no reason at all.

[tvbcof]

One thing I dont get is...
... if an address (A) is linked to me, and I start up another client sending to a newly generated address (B), send the coins there, and then go on to some online wallet and back and forth...

How can anyone prove I am the owner of address B and so on? I might just have bought a bunch of digital goods with it, or given it away for no reason at all.

If one is trying to generate a relationship graph, one could still be fairly accurate to assume that you did not 'just give it away for no reason at all.'

If, however, it became fairly commonplace for people pass chunks of BTC around in wallets (or more generally, pass private keys), then there is a fair chance that the BTC next became visible under control of someone who had no direct link.  A fair enough chance to throw some real uncertainty into a relationship graph at least.

For people like myself who are overly paranoid about individual relationship tracking and do not trust centralize authorities (like on-line wallet services and exchanges) to have the will or ability to resist state sponsored police activities, methods of transferring private keys are of some interest.

[Jack of Diamonds]

You can recycle money with Tradehill or Mt. Gox. Two safest e-wallets in existence.

1. Send funds to Mt. Gox (or even better; Mine your own coins and set the payment address to either one of those sites)
2. "Withdraw" whenever you want to send to someone (use their address as the recipient)
3. Get a new disposable address each time you receive funds

You don't even need to supply your real name & address (you could even log in with a proxy) as long as you don't request a wire transfer.

All "trails" lead to either site & not to your identity.

[Nefario]

You can recycle money with Tradehill or Mt. Gox. Two safest e-wallets in existence.

1. Send funds to Mt. Gox (or even better; Mine your own coins and set the payment address to either one of those sites)
2. "Withdraw" whenever you want to send to someone (use their address as the recipient)
3. Get a new disposable address each time you receive funds

You don't even need to supply your real name & address (you could even log in with a proxy) as long as you don't request a wire transfer.

All "trails" lead to either site & not to your identity.

Sorry, I need to correct you, glbse.com is the safest e-wallet, followed by Mt.Gox some distance behind.

How is this? because we use RSA key pairs to authenticate and authorise, we never know the private key.

[amincd]

One could always create as many empty wallets as one likes to pass funds around, mimicking the involvement of other people, so you could claim the last transaction in a wallet wasn't you... but that seems harder to sell (plus there could always be a demand to know who the first "fake" wallet belonged to.)

That's what the 25,000 BTC thief tried to do, but as the first image shows, it's still obvious that all of those wallets all belong to the same person.

What one could do is send Bitcoin to Mtgox/Tradehill/GLBSE, create a new wallet, then withdraw those Bitcoin back to the newly created wallet. Not withdrawing all of it right away would further reduce the ability of others to link the withdrawl to the deposit (e.g. if you deposit 102.24 BTC to an e-wallet, then the next day withdraw 102.24 BTC to your new local wallet, others could deduce that the owner of the BTCs deposited on day 1 is the owner of the wallet that the BTCs were deposited to on day 2).

This would only become convenient if a GUI is created that enables easy switching between different wallets. Until then, Jack of Diamonds' method seems to be the most convenient.