Blockchain's gift of Pseudonymity and how we lost it

[bitcoindusts]

I'm not to tell that the people behind bitcoin & the blockchain was anti-government and central control, but i'm pretty sure they are pro-privacy.

Thus, we were gifted a wonderful treat of pseudonymity where transactions are public yet remained disconnected from our real world identities.  Yes, the world may know the origin (sending wallet), the amount that was transacted and even the destination (receiving wallet).  But that's all there is to it.

Pseudonymous transactions are actual safeguards for us not to be under anyone's surveillance (for whatever purpose it may serve).  The reality of our personal welfare being compromised by watchful eyes that has been proven mischievous over time is evident.

Take for example the "cache & cookies disclaimer" that you have to often agree to when you go online. Disguised as helpful tools to make your browsing experience more relevant but in reality, records your every move, your every activity. And only the gods would know how these information can be used for or against you. Nonetheless, your privacy was breached.

Breach of privacy was a problem of great concern, and great minds understood that it has to be addressed. And as many of us loved the Incognito Mode of Google Chrome, Blockchain brought us pseudonymity for crypto transactions.

The original design was for transactions to remain pseudonymous from end to end, and the public records remained as such until you cash-out.  It is here that we lost the pro-privacy gift of the blockchain.

The moment you cash-out your bitcoin to a bank or an exchange or to any other means that requires a real world identity, pseudonymity is lost. Satoshi's rally for privacy goes down the drain. Your identity is uncovered. They can already trace your bitcoin wallet address and all other wallet addresses you transacted with.

The effort of pseudonymity is lost. But is there really a way out? Can we really remain pseudonymous to continue the blockchain's rally for privacy?

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[Bamelin]

The goal is that eventually people buy goods with BTC.

[franky1]

they WERE pro-privacy.. but that was pre-2013

also. if you look at stats pages of LN. it reveals who, how many nodes. how much value those nodes hold and if smart you can keep checking those nodes and when the values change you can log that. and then see the nodes they are connected to and log where the funds went to.

EG
A[20:10]B[30:15]C
C can find out what B has with A. because B can only send 10 to A
if A moved10 to be...
A[10:20]B[30:15]C
C can then see that B can move 20 to A so C knows that A just paid B 10

channels actually announce how much they hold and can channel. to allow people to choose who they should choose as a channel partner.. so its not private at all

i found it funny how LN was proposed as a tool to be more private. and yet i can find out mor about a user of LN than i can find out by a mainnet bitcoin user

again privacy is being eroded. especially when LN is moving to a factory/watchtower model which will then require AML KYC and having them watchtowers/factories register as 'custodians' to then require KYCing their channeled users

if only back in 2013 we didnt not rally/lobby for rgulation of businesses (they police and KYC users) but instead rally/lobbied for consumer protction (users police and KYC businesses)

[Herbert2020]

it is not lost just because people are trading bitcoin. it is still there for whomever wants to use it, it is just that more people are currently interested in bitcoin as a way of making money because of its price rise than people who are interested in bitcoin as a currency to benefit from its decentralization and the privacy that it offers.

and i don't think it is a bad thing. in a way it is the combination of two worlds: the decentralized world of bitcoin with the centralized world of fiat. and since we still need to dump our fiat to get bitcoin, we need that pseudo-centralization.

[Ava Duvall]

it is not lost just because people are trading bitcoin. it is still there for whomever wants to use it, it is just that more people are currently interested in bitcoin as a way of making money because of its price rise than people who are interested in bitcoin as a currency to benefit from its decentralization and the privacy that it offers.

and i don't think it is a bad thing. in a way it is the combination of two worlds: the decentralized world of bitcoin with the centralized world of fiat. and since we still need to dump our fiat to get bitcoin, we need that pseudo-centralization.

I aslso, dont think its a bad thing. and you made a good point needing to dump fiat to get bitcoin.

[BitcoinFX]

When I first discovered Bitcoin I guess I asked myself the following;

1. Does the system work (as a digital cash) - yes, seems so.

2. Does the system attribute the functions of cash (fiat) - yes, pseudo-privacy and pseudonymity - which it does without centralization - cool!

Being an active user of privacy systems like Tor (and advocate through agency i.e. action) I also realized the facets and pitfalls of Bitcoin in this regard. Much as the OP has described ...

For example, in terms of a strong adversary, if you (have ever) run your Bitcoin wallet on clearnet then your ISP, the three letter agencies and your government(s) know that you (or someone in your household or office etc.,) are a Bitcoin user. The same applies to visiting this forum etc.,

Most of the general population of the world does not understand the true level of mass surveillance in this regard. Your meta data (and everything you do on the internet) is collected and now stored for at least 100 years i.e. the entire history of you. This includes your encrypted data and this has been happening long before the Snowden revelations, examples ...

- https://en.wikipedia.org/wiki/ECHELON
- https://en.wikipedia.org/wiki/Total_Information_Awareness
- https://en.wikipedia.org/wiki/Utah_Data_Center

Consider that this does not even included the data that you give away freely to the corporations and big business on the internet everyday.

Changing threats to privacy ...
- https://youtu.be/dBtmzY5gcO8?t=2m53s

...

Perhaps the most important aspect in terms of individual user privacy is cash-in i.e. the mode and means of acquisition - basically how a user got Bitcoin in the first place - were they mined, purchased directly or exchanged in return for goods and services.

Having said this, you can still use Bitcoin today with quite strong Pseudonymity, if you think carefully about what you are doing and you practice good obfuscation techniques.

Privacy is not easy, especially on the internet. Maintaining an individual right to privacy whilst affording protections against things like terrorism and crime is difficult.

[KR$N]

The gift is still there, it is up to users to accept this gift or prefer less privacy for their own usability preferences.  Even for the fiat/bank gateway one can still use mixers, new private key etc. It was\is always about the freedom of choice for the user and not about mandatory anonymity of the system.

[DooMAD]

how much value those nodes hold and if smart you can keep checking those nodes and when the values change you can log that. and then see the nodes they are connected to and log where the funds went to.

Now swap instances of the word "nodes" for "addresses" and realise that's exactly the same as on-chain Bitcoin addresses and checking their transaction history on the blockchain.

i found it funny how LN was proposed as a tool to be more private. and yet i can find out mor about a user of LN than i can find out by a mainnet bitcoin user

With on-chain, you can tell exactly how many transactions someone (or indeed everyone) has sent or received, effortlessly.  You can't easily do that with LN.  To date, there have been a total number of ~336,750,000 Bitcoin transactions since 2009.  If Lightning is so totally lacking in privacy, perhaps you'd like to tell us all how many LN transactions there have been in the relatively short time LN has been active on mainnet?

[Red-Apple]

what we need is adoption.

right now as you said you cash-out your bitcoin to a bank or an exchange, in short back to fiat. and most people don't even consider bitcoin more than an investment. but as i said we need more adoption, so that we can see more places accept bitcoin as payment.
for instance if i want to buy a car today, i can not find any dealership that accepts bitcoin. they all want fiat so i have to cash out my bitcoin.

so you can't say it is lost in my opinion. what is happening is that we are not using bitcoin to its full potential.

[BitcoinFX]

The gift is still there, it is up to users to accept this gift or prefer less privacy for their own usability preferences.  Even for the fiat/bank gateway one can still use mixers, new private key etc. It was\is always about the freedom of choice for the user and not about mandatory anonymity of the system.

Indeed. We can all envisage situations where speed and security actually take preference over privacy and anonymity. As seen in the Changing threats to privacy video I shared above, the key is user choice.

However, Person-to-Person transactions within four walls will always be more private than using the internet.

Consider this, do you actually even need the internet (active) to transact with Bitcoin?

- https://youtu.be/hwohadcUv4A

[bitcoindusts]

The goal is that eventually people buy goods with BTC.

It is the end goal really and the primary design of bitcoin was to be a system of payment.

And so far, the progress has been good. We are seeing exchanges that offer additional services and ability to buy goods with bitcoin.

Yet, the pseudonimity of transaction ends up revealing real world identity of the recipient, if not ours. And from there, tracing could be conducted to find out who actually made such payment.

So the best interest of protecting our real world identity is still compromised one way or the other.  Really wondering how we can end up being totally pseudonymous in every aspect.

[bitcoindusts]

they WERE pro-privacy.. but that was pre-2013

also. if you look at stats pages of LN. it reveals who, how many nodes. how much value those nodes hold and if smart you can keep checking those nodes and when the values change you can log that. and then see the nodes they are connected to and log where the funds went to.

EG
A[20:10]B[30:15]C
C can find out what B has with A. because B can only send 10 to A
if A moved10 to be...
A[10:20]B[30:15]C
C can then see that B can move 20 to A so C knows that A just paid B 10

channels actually announce how much they hold and can channel. to allow people to choose who they should choose as a channel partner.. so its not private at all

i found it funny how LN was proposed as a tool to be more private. and yet i can find out mor about a user of LN than i can find out by a mainnet bitcoin user

again privacy is being eroded. especially when LN is moving to a factory/watchtower model which will then require AML KYC and having them watchtowers/factories register as 'custodians' to then require KYCing their channeled users

if only back in 2013 we didnt not rally/lobby for rgulation of businesses (they police and KYC users) but instead rally/lobbied for consumer protction (users police and KYC businesses)

Thank you for the insightful participation frank.

Indeed, with KYCs in place, the gift of pseudonymity is indeed in peril. And with you citing LN as an example, it makes one ask, "does pseudonymity, as much as a primal design of bitcoin, became irrelevant?"  Many exchanges had already moved towards KYCs. Some exchanges made it optional, yet detrimental of our transactional capability in such a way that our spending limit will be capped much lower than KYCd customers.

It feels that soon, pseudonymity will be a thing of the past. What do you think?

[bitcoindusts]

it is not lost just because people are trading bitcoin. it is still there for whomever wants to use it, it is just that more people are currently interested in bitcoin as a way of making money because of its price rise than people who are interested in bitcoin as a currency to benefit from its decentralization and the privacy that it offers.

and i don't think it is a bad thing. in a way it is the combination of two worlds: the decentralized world of bitcoin with the centralized world of fiat. and since we still need to dump our fiat to get bitcoin, we need that pseudo-centralization.

I guess you are right Herbert, perhaps this is a way of the bitcoin economy to adapt to the needs of the time.

It is just saddening, there was so much privacy protection that bitcoin was premiered for yet it seems we are ending up back to the traditional surveillance that financial & government entities could conduct on us.

Additionally, as you stated, it seems decentralization had to be compromised too as a respond to better regulations and freedom to move from digital to fiat currency with less restrictions from governing authorities.

And that's twice the sadness for bitcoin advocates i guess.

[bitcoindusts]

what we need is adoption.

right now as you said you cash-out your bitcoin to a bank or an exchange, in short back to fiat. and most people don't even consider bitcoin more than an investment. but as i said we need more adoption, so that we can see more places accept bitcoin as payment.
for instance if i want to buy a car today, i can not find any dealership that accepts bitcoin. they all want fiat so i have to cash out my bitcoin.

so you can't say it is lost in my opinion. what is happening is that we are not using bitcoin to its full potential.

I do hope it is not lost as you expressed Red-Apple.

Adoption is really a big of a word right now for the cryptocurrency world, and more so for bitcoin as it remains to be the most popular and well spent crypto globally.

The way i see it, there is a massive need of merchants adopting to bitcoin payments. Perhaps from there, we would start to gain back the gift of pseudonymity in its full potential.

[bitcoindusts]

The gift is still there, it is up to users to accept this gift or prefer less privacy for their own usability preferences.  Even for the fiat/bank gateway one can still use mixers, new private key etc. It was\is always about the freedom of choice for the user and not about mandatory anonymity of the system.

Indeed. We can all envisage situations where speed and security actually take preference over privacy and anonymity. As seen in the Changing threats to privacy video I shared above, the key is user choice.

However, Person-to-Person transactions within four walls will always be more private than using the internet.

Consider this, do you actually even need the internet (active) to transact with Bitcoin?

- https://youtu.be/hwohadcUv4A

Thank you for the time BitcoinFX.  The video by the way was not bitcoin related, yet is one of the free ideas of thinkers & visionaries that may appall others while making other free thinkers applaud, pretty much like how bitcoin came to be.

Going back to your reply though, as much as peer-to-peer transactions within four walls may be the securest form of passing information, the necessity of internet connection is pretty much needed.

Bitcoin transactions need confirmation & distribution. I think it would impossible to do that offline. The design was for a peer network to decide that the transaction is legit and pass that information to everyone else and make sure the transaction is recorded on everyone else's ledger.

So i guess we really could not take the internet out of the equation at all.

[Herbert2020]

it is not lost just because people are trading bitcoin. it is still there for whomever wants to use it, it is just that more people are currently interested in bitcoin as a way of making money because of its price rise than people who are interested in bitcoin as a currency to benefit from its decentralization and the privacy that it offers.

and i don't think it is a bad thing. in a way it is the combination of two worlds: the decentralized world of bitcoin with the centralized world of fiat. and since we still need to dump our fiat to get bitcoin, we need that pseudo-centralization.

I guess you are right Herbert, perhaps this is a way of the bitcoin economy to adapt to the needs of the time.

It is just saddening, there was so much privacy protection that bitcoin was premiered for yet it seems we are ending up back to the traditional surveillance that financial & government entities could conduct on us.

Additionally, as you stated, it seems decentralization had to be compromised too as a respond to better regulations and freedom to move from digital to fiat currency with less restrictions from governing authorities.

And that's twice the sadness for bitcoin advocates i guess.

well "we" are not ending up anywhere, it is only those who are trading on exchanges. and even they can re-gain their privacy through different methods such as using a bitcoin mixer.
additionally to clarify the second part the decentralization has different forms. the one that is often talked about is the decentralization of bitcoin. that is not compromised. bitcoin is still decentralized and permissionless, it doesn't matter how people buy it. but the other case of decentralization is when you do the exchange and that is only compromised for those who use centralized exchanges to gain bitcoin. otherwise you can use decentralized exchanges, trade P2P, or simply accept bitcoin as payment and stay private and decentralized.

[squatter]

The original design was for transactions to remain pseudonymous from end to end, and the public records remained as such until you cash-out.  It is here that we lost the pro-privacy gift of the blockchain.

Early versions did include a pay-to-IP function, which was sort of a privacy pitfall on top of being a security pitfall.

The moment you cash-out your bitcoin to a bank or an exchange or to any other means that requires a real world identity, pseudonymity is lost. Satoshi's rally for privacy goes down the drain. Your identity is uncovered. They can already trace your bitcoin wallet address and all other wallet addresses you transacted with.

The effort of pseudonymity is lost. But is there really a way out? Can we really remain pseudonymous to continue the blockchain's rally for privacy?

There are a few methods that should improve privacy in the future. I believe Dandelion is already compatible with Bitcoin, and can obfuscate the originating point of transactions. Progress is being made on Confidential Transactions, which make transaction amounts private. Schnorr signatures are also exciting from a privacy perspective because they incentivize Coinjoin-type transactions.

It's true that web browsers (cookies) and payment processors like Bitpay (who collect lots of data about you) remain big problems for privacy, though.

[aoluain]

what we need is adoption.

right now as you said you cash-out your bitcoin to a bank or an exchange, in short back to fiat. and most people don't even consider bitcoin more than an investment. but as i said we need more adoption, so that we can see more places accept bitcoin as payment.
for instance if i want to buy a car today, i can not find any dealership that accepts bitcoin. they all want fiat so i have to cash out my bitcoin.

so you can't say it is lost in my opinion. what is happening is that we are not using bitcoin to its full potential.

I do hope it is not lost as you expressed Red-Apple.

Adoption is really a big of a word right now for the cryptocurrency world, and more so for bitcoin as it remains to be the most popular and well spent crypto globally.

The way i see it, there is a massive need of merchants adopting to bitcoin payments. Perhaps from there, we would start to gain back the gift of pseudonymity in its full potential.

Yes adoption is important. I believe that the percentage of holding and
cashing back to FIAT is high because bitcoin is not widely spendable.
In order to use bitcoin as a currency a lot of the time it has to be converted
to FIAT.

If there are more traders accepting bitcoin anonymity should remain
but the other issue is aquiring bitcoin, most use a bank account to get
bitcoin, there is another anonymous way to get bitcoin which is slowly
eroding and that is cash.

[jseverson]

The moment you cash-out your bitcoin to a bank or an exchange or to any other means that requires a real world identity, pseudonymity is lost. Satoshi's rally for privacy goes down the drain. Your identity is uncovered. They can already trace your bitcoin wallet address and all other wallet addresses you transacted with.

Did satoshi really rally for privacy though? I genuinely don't know. I always thought that the focus was on decentralization.

I do get your point, but wouldn't it be the same thing when let's say, you buy an item off a merchant directly with Bitcoin? Your identity will be uncovered one way or another, and they can just as easily trace everything you mentioned even without banks. I'd say the way out is mixers because you can cut or at least shorten your trail with them, but the moment you transact with another person (or most of the time anyway), you cede some level of privacy.

[squatter]

The moment you cash-out your bitcoin to a bank or an exchange or to any other means that requires a real world identity, pseudonymity is lost. Satoshi's rally for privacy goes down the drain. Your identity is uncovered. They can already trace your bitcoin wallet address and all other wallet addresses you transacted with.

Did satoshi really rally for privacy though? I genuinely don't know. I always thought that the focus was on decentralization.

Satoshi definitely had privacy in mind when he designed Bitcoin. The primary focus was on removing third party trust, but the whitepaper specified the reasoning for anonymous public keys and for the practice of never reusing addresses -- privacy:

10. Privacy
The traditional banking model achieves a level of privacy by limiting access to information to the
parties involved and the trusted third party. The necessity to announce all transactions publicly
precludes this method, but privacy can still be maintained by breaking the flow of information in
another place: by keeping public keys anonymous. The public can see that someone is sending
an amount to someone else, but without information linking the transaction to anyone. This is
similar to the level of information released by stock exchanges, where the time and size of
individual trades, the "tape", is made public, but without telling who the parties were.

As an additional firewall, a new key pair should be used for each transaction to keep them
from being linked to a common owner. Some linking is still unavoidable with multi-input
transactions, which necessarily reveal that their inputs were owned by the same owner. The risk
is that if the owner of a key is revealed, linking could reveal other transactions that belonged to
the same owner.

I'd say the way out is mixers because you can cut or at least shorten your trail with them, but the moment you transact with another person (or most of the time anyway), you cede some level of privacy.

That's why it's important to break the chain of transactions, whether through a mixer or non-KYC services with proxy/VPN. Even still, there are sophisticated methods to deanonymize transaction trees. I'm hoping that new privacy methods like Dandelion and CT will be available sooner than later.