Blockchain, Cryptocurrency and Privacy.

By Guy Brandon

Bitcoin never was as anonymous as many of its users assumed. More recent cryptocurrency protocols offer a step-change in privacy – not just obscuring the transaction trail but omitting it altogether.

Bitcoin might now be a global phenomenon on the verge of being co-opted by Wall Street, but just a few years ago it was a niche currency used only by geeks, libertarians and anarchists. The first true form of online cash grew out of the ‘cypherpunk’ community: a group of technophiles who were concerned about the impact the rise of the internet would have on financial privacy. The cypherpunks grasped 30 years ago what the rest of the population is only just waking up to: knowledge is power, and unsecured personal data will be exploited.

Strong Encryption

The cypherpunks’ solution was the unashamed use of strong encryption. Eric Hughes’ Cypherpunk’s Manifesto makes the point unambiguously: ‘We must defend our own privacy if we expect to have any. We must come together and create systems which allow anonymous transactions to take place. People have been defending their own privacy for centuries with whispers, darkness, envelopes, closed doors, secret handshakes, and couriers. The technologies of the past did not allow for strong privacy, but electronic technologies do.’

Bitcoin was certainly a step forward for private online transactions. It requires no intermediaries such as banks or credit card processors, no registration process, and the addresses it uses are simply long strings of essentially random characters that cannot intrinsically be linked to a real-world identity. Unfortunately, though, the blockchain offers a permanent, transparent record of all transactions. Put a foot wrong, and it is all too easy to follow the trail and build up a detailed picture of the transfers associated with a given account.

Mixing and Ring Signatures

A number of so-called privacy coins have attempted to address the privacy shortcomings of Bitcoin, adopting various different approaches. Dash – originally Darkcoin, then rebranded as ‘digital cash’ – uses mixing. By pooling lots of users’ coins and then sending them back out to new addresses, it makes it hard to trace where each transaction originated. (Bitcoin mixers or tumblers already exist, but by nature these operate somewhat outside the fringes of respectability. Typically accessible only via the darkweb, they have an unpleasant habit of going offline and taking customers’ deposits with them.)

Monero and others like it, meanwhile, use ring signatures. These enable one of a number of users to sign or approve a transaction, making it hard to know who was responsible. It’s a little like giving ten people a key to a room and then asking which of them left the door open.

Both of these obscure the transaction trail, but the nature of the blockchain is that every transfer is recorded forever. With sufficient resources, or at some point in the future when orders of magnitude more computing power are available, it may be possible to untangle that puzzle.

Mimblewimble

One of the most interesting privacy protocols to arise in the crypto space in recent months is Mimblewimble. (The name is a Harry Potter reference to a tongue-tying spell; just about all that is known about the creator of the Mimblewimble protocol is that he used the online name Tom Elvis Jedusor – the French equivalent of Tom Marvolo Riddle, Voldemort’s schoolboy name. Cryptographers like their in-jokes as much as anyone else.)

Mimblewimble, which was ultimately implemented and launched by two different teams in the Grin and Beam cryptocurrencies, takes a fundamentally different approach. Instead of obscuring information, it uses some powerful and elegant cryptography to avoid recording it in the first place. No addresses or amounts are held on the blockchain. Instead, encryption techniques enable users to prove they own blocks of coins, and transfer ownership to someone else, without revealing who or how much is involved.

Like any other technology, encryption is an arms race, with new cryptocurrency platforms constantly trying to stay one step ahead of those who want to compromise their users’ financial privacy. There will never be a last word in privacy, only a better solution than the one before.

But for those who understand the value of financial privacy, the strong encryption, zero-knowledge proof and peer-to-peer transactions that the latest blockchain protocols provide can offer levels of security that – as Eric Hughes said back in 1993 – we have never been able to enjoy before.