Role of Information Cascades in anonymity with Bitcoin
Link: https://coincenter.org/entry/how-anonymous-is-bitcoin
In class, we have discussed how information cascades can influence people in making up decisions based on only the evidence that they observe. We saw the urn example where due to lack of true knowledge of the urns, each person has to make estimates from the responses of previous people who had picked out of the urn. Based on the evidence they had, they would either announce their guess as to whether the urn was majority blue or majority red. And in certain situations, it could lead to cascades where everyone announced red although the urn was majority blue. This resulted in spread of false knowledge and a loss for everyone.
The article describes how alternatively information cascades may reveal true knowledge in a situation where there is the only small amount of information available, that is the IP of a person based on a transaction which might be believed to highly anonymous.
This effect occurs due to the fact that when a bitcoin transaction is made, it’s propagated through the bitcoin node network beginning with the computer that first broadcasts the event to its peers. It’s then forwarded to their peers in an information cascade that usually reaches every node in the network within a few seconds. Now if one can find a way to connect to a majority of nodes say by owning highly connected nodes, then that person can effectively trace the point of origin and the IP address of the transactor.
An example of this is a public IP address deanonymization site “blockchain.info”, which discloses the IP address of the first node to report a transaction to its servers.