During the early years of the crypto space, Bitcoin was considered a highly anonymous form of currency, and indeed that is one of the primary reasons why it became so popular. However, just over a decade later, this digital asset is not considered anonymous at all. In response to this blockchain developers created cryptocurrencies which were specifically meant to be anonymous, but even the anonymity of most of these specially built privacy cryptocurrencies has been compromised. Essentially, anonymity is become increasingly scarce in the crypto space, and this is due to the rapid advancement of blockchain forensics.
Blockchain forensics is a technology that is used to de-anonymize crypto transactions via matching crypto wallet addresses with identities and tracing transactions. This is mostly done by using know your customer (KYC) and anti-money laundering (AML) identification data collected by exchanges. Additionally, blockchain forensics firms scour the internet to match crypto addresses and transactions with identities.
For example, if someone buys cryptocurrency on an exchange like Coinbase, all of their identification information is collected before they can even buy the crypto. Then when that person sends that crypto to a wallet outside of Coinbase, blockchain forensics firms can figure out that the external wallet outside of the exchange is connected to that person.
This is just a rudimentary example of blockchain forensics. Data processing algorithms and artificial intelligence (AI) are used to generate maps of crypto transactions, and these maps show the movement of crypto between various known wallets, exchanges, platforms, companies, individuals, etc.
The entire point of blockchain forensics is so that the government, banks, and crypto exchanges can ensure that crypto is not being used to launder money or for other criminal activities. If blockchain forensics finds that a certain crypto exchange user buys crypto that ends up being used for illegal activity, then that person’s exchange account and bank account get shut down.
However, a large fraction of crypto users believe that anonymity is a basic human right, and certainly, blockchain forensics impinges on this right, especially since these firms are in an absolute arms race to de-anonymize all crypto transactions.
There are some disturbing tidings recently when it comes to the advancement of blockchain forensics. The most disturbing news is that Chainalysis has announced that they have cracked the privacy of Dash and Zcash.
Both Dash and Zcash are specially built to provide anonymous transactions. Dash sends all transactions into a masternode, where that transaction is mixed with coins from other transactions, and then the transaction is sent to the destination wallet after being thoroughly ‘mixed’. Dash also has an additional privacy feature called private send which uses CoinJoin technology to further mix transactions.
Zcash on the other hand has powerful stealth technology, but users have a choice between using stealth and transparent transactions. Theoretically, if someone uses a completely stealth Zcash transaction, it should be anonymous.
The problem is that 99.3% of Dash users do not use private send, and 99.1% of Zcash transactions are not entirely stealthy. Therefore, blockchain forensics can trace and identify the over 99% of Dash and Zcash transactions which are not stealthy, and this data can be used to de-anonymize the remaining 1% of stealth transactions.
Another piece of disturbing news is that Coinbase is directly providing blockchain forensics technology to the Internal Revenue Service (IRS) and Drug Enforcement Administration (DEA) via its platform Coinbase Analytics. The reason this is a big issue is that Coinbase is the most popular retail crypto exchange in the United States, and practically all American crypto users have submitted their identification information to it.
Although Coinbase claims that their blockchain forensics business is completely separate from their exchange business, it is logical to conclude that the exchange readily shares all customer identification information with the government. Indeed, it is already well-known that it submits data to the IRS for each and every user on a yearly basis. Therefore, every crypto user in America who has used the exchange has certainly been de-anonymized.
Ultimately, the only bastion of anonymity left is Monero. Out of all of the privacy cryptocurrency, Monero is the only major crypto which requires all users to use stealth technology. In other words, unlike Zcash where users can optionally have transparent transactions, its users are required to use stealth transactions.
The fact that 100% of Monero transactions are fully stealth has prevented blockchain forensics from making inroads into cracking the privacy of its users. That being said, since Monero is the last thing that blockchain forensics firms haven’t cracked, there is no doubt that blockchain forensics firms are working overtime to compromise the coin’s anonymity. The good news is that its developers are working overtime to increase Monero’s anonymity as well.
Essentially, their developers and blockchain forensics firms are in an arms race against each other, resulting in increasingly powerful stealth technology, but increasingly powerful blockchain forensics as well.
Thus, anonymity is becoming increasingly scarce in the crypto space, and Monero is the last major crypto left which is fully anonymous. However, considering that Dash and Zcash were recently cracked, there is no guarantee that Monero will remain fully anonymous forever.
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