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Analyzing the Privacy of Bitcoin’s Network

Bitcoin is traditionally thought to that provide a certain anonymity. When speaking about financial transactions it is important to make the distinction between anonymity and privacy. A transaction is anonymous when the purchaser remains unknown, while privacy is used in cases where what was purchased and the price paid for it are unknown. Cash is generally regarded as both the most private and anonymous method. Credit cards would fall into the opposite categories, as a purchaser’s identity and amount paid is attached to every transaction conducted. On the other hand, Bitcoin while keeping the user anonymous has little privacy. All transactions involving bitcoin are available on the block chain, a public ledger of all Bitcoin transactions ever executed. In some cases, Bitcoin may not even be anonymous, especially for those who use an online wallet service link their identity to their bitcoin usage.

In order to utilize bitcoin’s anonymity, a user must attain bitcoin through a private transaction. The only intrinsic information is the bitcoin address, whose private keys are maintained by the owners. A user can hold a single bitcoin address that stores many bitcoins or own many addresses corresponding to different bitcoins. A good measure to take is transferring any amount left over after a transaction to a new address. Using multiple addresses makes it difficult to follow the ownership.

One method that is decreasing the privacy of bitcoin usage is called the transaction graph analysis. It uses many different methods to study the transactions listed in the block chain. For example, paying close attention to transactions from more than one input address. These addresses can be looked up in the ledger to see what else that user has purchased. Another technique is finding a unique address in the ledger because it is highly likely this new address is a changed address. Some analysis includes looking at the precision of the amounts of bitcoin involved. If one transaction is a whole number, while the other contains multiple decimal digits, it’s easy to determine who is the purchaser and who is returning the change. Similarly looking at these precise numbers it is possible to determine from what currency the bitcoin was converted from. All this analysis only reveals the impact of a single user, but fails to link these transactions with the identity of the person. In order to remove the anonymity of these users as well, looking at public email forums or the information collected by businesses who accept bitcoin can be analyzed.

Another source of deanonymization is the fact that every computer participates in this transaction network by hosting a bitcoin node. The IP addresses that correspond to the announcement of bitcoin transactions is contributing to the decreased anonymity. There are about 6,500 nodes accepting connections from other nodes at the time of writing. The transaction propagation that spreads throughout the node network can reveal private information. The computer that begins the cascade can be assumed to be the origin of the transaction. Although there can be a random delay or service like the TOR router to offer some protection of a user’s IP address, with certain techniques the signal can be made available through the noise of other transactions to find the all those involved in the transaction.

Bitcoin is certainly more anonymous than many other forms of transactions, however it is not to the extent that many believe it to be. Even those who take many precautions to protect their identity may still be discovered due to the publicly available transaction ledger as well as transaction graph analysis.  As of now, it is too early to tell how the nature of these transactions will change over the next couple years especially with the development of tools by both anonymizers and deanonymizers.

http://www.coindesk.com/anonymous-bitcoin-backgrounder-policymakers/

http://www.investopedia.com/terms/b/blockchain.asp

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