Understanding Bitcoin: Cryptography, Engineering and Economics

CHAPTER 13The Privacy Battle

All transactions in Bitcoin are stored in the blockchain and therefore are public. However, transactions do not include information about the users behind them, only the Bitcoin addresses are included. This makes Bitcoin pseudonymous, because users’ privacy is hidden behind a pseudonym: the Bitcoin address.

This does not mean, however, that users’ privacy is protected. First, the balances held by each address are public and readily available just by querying the UTXO (Chapter 6). Second, addresses can be linked to one another by observing the transactions between them. Thus Bitcoin is sometimes compared to making someone’s bank statement available online but blanking out the name.

A consequence of Bitcoin’s lack of anonymity is that it opens the possibility for bitcoins not to be fungible. As the origin of the funds can be traced, some funds, such as stolen bitcoins or bitcoins known to have been used for illicit purposes, could be marked as tainted, thus breaking the fungibility. There are already some proposals to register Bitcoin businesses and/or users, and it is believed that the next natural step would be to control the origin of bitcoins. This would fragment the Bitcoin system and it is generally viewed as dangerous by the Bitcoin community (Buterin, 2013d).

This chapter will introduce some known techniques to de-anonymize Bitcoin users, as well as several technologies proposed to enhance privacy. A recent survey of the privacy issues in ...