Private Cryptocurrencies Challenge Bitcoin Fungibilitydiarweekly.com
Private Cryptocurrencies Challenge Bitcoin Fungibility
Bitcoin and most cryptocurrencies are pseudo-anonymous – all transactions are publicaly available online including the addresses and amount being sent. As a result, the coins can sometimes be traced back to a person through blockchain analysis. Privacy cryptocurrencies the likes of Monero and Zcash are attempting to solve the problem by masking all the information about the transactions to provide full anonymity. The movements of the privacy cryptocurrencies are near impossible to track, giving governments another technical obstacle to overcome.
When Bitcoin was introduced in 2009, it launched from a premise of shifting the power from governments, central banks and corporations to individual people. As with other decentralized cryptocurrencies, the ownership is guaranteed with the possession of private keys, which makes it impossible to be seized or manipulated by a central authority.
However, most of the cryptocurrencies including Bitcoin are pseudo-anonymous. Even though the transactions are not tied directly to an identity, every transaction is recorded publicly on the blockchain, which includes the sender’s address, the receiver’s address and the amount. By analyzing the blockchain, the coins can sometimes be traced back to the identity of users by looking at the patterns of transaction history. The issue of financial privacy is not only a matter for criminals but rather for anyone who wants the ecosystem of cryptocurrencies to remain decentralized.
Blockchain forensics companies such as Elliptic and Chainalysis are already providing actionable intelligence to law enforcement and other entities to help them identify illicit activities and assist with Anti-Money Laundering (AML) compliance. These companies obtain Know-Your-Client (KYC) information that is required to be provided for all the cryptocurrency exchanges and thus have access to identifiable information.
The current solution to enhance Bitcoin’s fungibility is to use a tumbling software such as the open source JoinMarket, which automatically mixes coins of different people to obfuscate the trail back to the fund's original source. Most of the wallets generate a new address each time a transaction is received to obscure the identity which helps, but is far from perfect.
Bitcoin’s inability to provide a fully private and fungible solution has ignited the creation of other cryptocurrencies that focus mainly on privacy features.
Monero, which launched in 2014 after forking from Bytecoin, is often considered the most prominent privacy-based cryptocurrency. Monero uses stealth addresses, which means that after every transaction is made, a random single-use address is generated, and the transactions are routed through that address. Stealth addresses therefore mask a receiver, which in turn assures that there is no linkability on Monero. However, in order to be truly private, Monero also solves the issue of traceability by utilizing ring signatures. The untraceability means that the original sender of the transaction is not able to trace when or where the recipient of the transaction moves the coins. Ring signatures essentially mix the real transaction with a few other already existing transactions on the blockchain, which guarantees plausible deniability. In January 2017, Monero implemented an improved version of ring signatures called RingCT, which also obscures the amount being transacted. RingCT became mandatory for every transaction after September 2017.
