One major characteristic of cryptocurrencies that have endeared the technology towards users is the ability to perform anonymous transactions. This ability to perform transactions in an obscure, unclear or unintelligible manner is known as obfuscation.
Anonymity is important
Confidentiality of information and security of transactions are some of the benefits of introducing such anonymity within the distributed ledger technology environment.
Confidentiality
Technically, most platforms involve systems and methods that facilitate computations that are publically defined while assuring the confidentiality of the input data provided, the generated output data or both using homomorphic encryption on the contents of the secure distributed transaction ledger.
Jeremy Epstein, CEO of Never Stop Marketing, says:
“Anonymity is indeed an important feature for many in the crypto world. People in this industry are acutely aware of the benefits and downsides of technology, so they have a deep appreciation of how nearly every activity leaves a “digital fingerprint’ of where you have been.”
To the layman, the simple explanation could be as implemented by blockchain.info in its system of constantly changing addresses for a given wallet. This method discourages the ability to trace payments made to a particular wallet.
However, some other platforms like Private Instant Verified Transaction (PIVX) use the process referred to as mixing mechanism to achieve anonymity.
Manipulation and control
Epstein notes how corporations have been identified to manipulate public opinion, making reference to a publication in the Wall Street Journal about the potentials of Facebook and Google in doing so. Pitching that against financial information, Epstein says that users of platforms without anonymity will be potentially susceptible to the control and manipulation of others.
Obfuscation
In the case of PIVX, its wallet coin mixing is based on CoinJoin. CoinJoin is a process which involves matching a dark wallet user with another dark wallet user who is making a payment at around the same time. The transactions are combined and encrypted so that it is very difficult to determine who paid who.
PIVX’s implementation is done in a decentralized fashion facilitated by the network of masternodes. This provides an additional layer of privacy in transactions. While not perfectly anonymous, if a nefarious actor were to control 50 percent of the current masternodes they would have less than 0.5 percent chance of de-anonymizing an individual transaction that was mixed with eight rounds of obfuscation.
Some examples cited by Epstein in the implementation of privacy and anonymity include OpenBazaar’s enablement of Tor support to increase the anonymity of transactions and also Zcash.
Two sides of the coin
Hrishikesh Huilgolkar, the Blockchain developer at Innominds, thinks that anonymity is very important in Blockchain transactions. Huilgolkar notes that it is considered that cryptocurrency transactions, such as in the case of Bitcoin, are “uncensorable,” a notion that he observes to be untrue.
According to Huilgolkar, if miners decide not to include a transaction to or from a certain address, the transaction can be censored. However, he notes that if transactions are anonymous and miners are unable to determine the address of either of the parties, they cannot censor it.
Huilgolkar explains: “It is important for users to maintain their privacy for other reasons. Every time a user makes a transaction with someone, they are giving their address, which can be used to find out the users crypto-net worth and the particular exchange the user uses, etc. This information can be used against the user for example in social engineering, hacking, blackmail, kidnapping or by law enforcement where cryptocurrencies are illegal, etc.”
Huilgolkar also explains that in the case of DApps, especially in situations where different enterprises are using private Blockchains, usually different companies employ a single DApp. Such companies may not like to expose their transactions and other actions taken on a DApp to their competitors.
At the same time, trusted third parties such as regulators should be able to read their transactions if required. This makes privacy in the case of enterprises a tad bit more challenging.
In certain DApps such as in betting and gambling, it is crucial to have private transactions for basic functionality.
Downside
However, Huilgolkar identifies the downside of anonymity as it concerns illegal transactions. He notes that in such cases, it will be very difficult for law enforcement agencies to identify the culprits. He also notes that less transparency can affect the trust of users of the technology since they may not be able to see currency generation, inflation rate and other transactions on the Blockchain.
Huilgolkar explains that this can be seen in the case of zk-SNARKs used in Zcash, where a trusted initial setup is required. If this is done improperly, an attacker can generate infinite currency without anyone knowing. Also in the case of Monero, the transactions are not completely private and data analytics can be used to analyze and link transactions with each other.
Social discrimination
Nwali Chibueze, the founder of Nigeria based Bitcoin exchange Sungrace Exchange, says that privacy and anonymity remain a fundamental right of every human being in any civilized society. According to Chibueze, most responsible governments insist that every one of their citizens is entitled to their privacy, including privacy of transactions. He also notes that privacy of transactions can be employed in the fight against social discrimination.
Chibueze explains:
“Privacy coins does not necessarily mean encouraging illegal transactions. There are situations where an individual may be suffering from a commonly discriminated ailment and wouldn’t want to purchase medication via traceable transaction systems. Under such a circumstance, anonymity and privacy of transaction should be encouraged as long as it does not involve the purchase of illegal substances.”
Criminality can be tackled
While considering the dangers posed by anonymity as it pertains criminal activities, Epstein notes the existence of possible criminal application.
However, he explains that such challenges must be overcome by the government, law enforcement and regulatory agencies.
Epstein says:
“Criminals will tend to use this innovation, but I don’t want us to “throw the baby out with the bathwater.” Law enforcement, regulatory agencies and governments are going to have to adapt to this new environment. It will be challenging. Still, the pros far outweigh the cons, in terms of things like individual freedoms, personal liberty and privacy. Plus, safety from manipulation and control by “big data” driven corporations.”