Privacy, Deanonymization, and Mixing #

The need for financial system privacy #

• Supply chain privacy: a manufacturer doesn’t want to reveal how much it pays its supplier for parts
• Payment privacy: company that pays its employees in crypto wants to keep list of employees and salaries private
  • End users need privacy for rent, donations, purchases

However: bare usage of blockchain results in thransactions being public to everyone!

Types of privacy #

• Pseudonymity (weak privacy)
  • Every user has long term consistent pseudonym (e.g. Reddit)
    • Pros: reputation
    • Cons: link to real-world identity can leak over time
• Full anonymity: user’s transactions are unlinkable
  • Cannot tell if two transactions are from the same address

Privacy from who? #

• No privacy: everyone can see all transactions
• Privacy from the public: only trusted operator can see tranasactions (e.g. Visa, Mastercard)
• Semi-full privacy: only “local” law enforcement can see transactions
• Full privacy: no-one can see transactions (e.g. TornadoCash)
  • Negative aspects: how to prevent criminal activity (supporting positive applications, but prevent the negative ones) and ensure legal compliance:

De-anonymization strategies #

Strategies for deanonymizing Bitcoin addresses

• Heuristic 1: 2 addresses input to a Tx: both addresses controlled by the same entity
• Heuristic 2: change address is controlled by the same user as input address

Private coins on a public blockchain #

• Attempt 1: simple mixing
  • Transaction inputs: users send Tx to mixer, mixer generates fresh addresses and sends Tx to intended recipients
  • However: mixer knows the shuffle, and can abscond with the money
• Attepmt 2: mixing without a mixer
  • CoinJoin (BTC)
  • TornadoCash (ETH)