Light and Dark: About Bitcoins privacy and transparency at Bitcoin
When you think about privacy at Bitcoin, it often happens in three steps. Many, however, stop at the second one. By doing so, they miss out on the gaze - and miss an important reason why Bitcoin is truly revolutionary.
Of course, I can only start where I am. I have thought about the privacy and transparency of Bitcoin in three steps. Only then, then, and finally so. That is, of course, subjective. But I feel like many people go through the same steps - but stop at the second. So here are the three steps that have led me to understanding the privacy of Bitcoin, where I am today.
1. Anonymous magical Internet money
When you first come across Bitcoin, you usually think, "Wow, an anonymous internet money, great!". It's a good thing because people are worried about privacy in times of digital mass surveillance, which is currently creating the worst surveillance company of all time. Nothing is needed as much as more privacy.
Of course you also think about the bad things that can happen with Bitcoin. Heroin traders, cheaters, killers, kidnappers, arms dealers and so on. But that's just the price. Freedom does not exist conditionally, but only for all. If the individual is to be free, then the murderer must be free, as long as he was not convicted. There is no gray area here and no compromise.
To arrive here, you have to think a bit. Sadly, you realize that all this invested mental energy was for the cat, taking the second step.
2. Bitcoin is not private enough
When you look at Bitcoin, you quickly realize that the cryptocurrency is not anonymous. It is pseudonym: Each transaction is associated with an address and has references to its predecessor and successor. The system is completely transparent and traceable. There is a wallet clustering algorithm that allows you to find out which addresses belong to a wallet.
Bitcoin is not only transparent - the data is also validated and unchangeable. You leave your footsteps for all eternity. This makes Bitcoin an extremely bad tool for criminals. No matter how well they hide - it can always happen that the tracks on the Blockchain will be deciphered in the future. For example, Alexander Vinnik, a professional money launderer who washed ten or hundreds of thousands of bitcoins from hacks between 2011 and 2014. He was finally caught by intensive blockchain analysis of a Japanese group.
If Bitcoin is not even private enough for an experienced money launderer like Vinnik, how can it be private enough for you? One recognizes that Bitcoin is not a tool for privacy - but for monitoring.
At this point, many people are disappointed. Bitcoin is not private enough. Crap. Many are fleeing Altcoins like Monero, who promise absolute anonymity, while most hope that Bitcoin will be more private in the future. Lightning is a big hobby-maker here, as the transactions do not end up on the blockchain and are more or less anonymous. Bitcoin, according to the second step, is not private enough - but maybe it can be.
But this ignores the third step we are coming to now.
3. A perfect compromise
In itself, this step is very simple. He merely demands that one breaks with a fundamental acceptance of the first two steps.
You have to give up the "one or zero" mentality. So far, Bitcoin has been either "anonymous" or "transparent," and the two categories are fully understood. It is either - or. As a historian and social scientist, I keep asking myself if this is the result of an "IT mentality". Computers only know 0 or 1. A software works or not. A crypto algorithm is safe - or broken. This is always the case with machines. Never with humans.
An example: the Enigma, the crypto-machine used by the Nazis to encrypt their communications. The Allies have broken the algorithm and were thus able to predict the routes of the submarines of the Germans and the planes of the Japanese. Enigma was not good enough to hold when you stood in the world war with the most technically advanced states. But since decryption required the continued work of thousands of people, Enigma would have been secure enough to protect citizens from mass surveillance.
There is no "either-or" in the real world of humans. Things can be broken, but useful, and they can be perfect, but useless. To understand what privacy means in society, you need new categories that are not as brittle as mathematics, but compatible with sociological processes. You need the right words to talk about what's going on in the real world.
The difference between surveillance and observation
An important and established cut is between the categories of "mass surveillance" and "observation". I read about it for the first time in a book by Bruce Schneier, but unfortunately I can not find the quote anymore.
Mass surveillance is bad. A state (or corporation) sets up cameras, creates a system of civil spying, intercepts Internet traffic, and uses machine learning and artificial intelligence to analyze the data. You just have to look to China to see how nightmarish mass surveillance is in the digital age. A partnership between the party and startups is in the process of creating a total mass surveillance of everything in real time. If you are looking for a dystopia, China is currently a good start.
Observation is something completely different. It means that a state (or a company) invests resources to observe specific individuals: police officers shadow the person, interview neighbors and business associates, request documents, and so on. The good old footwork. Observation is a technique to track criminals. It is necessary for a society to hold individuals accountable for their actions.
Basically, observation is just the opposite of mass surveillance. Mass surveillance happens automatically, in real time, without breaking points and scales to every single person in society. Observation, on the other hand, requires human work, media breaks, a lot of time, and only scales to very small parts of society.
Nobody wants mass surveillance, but almost everyone agrees that surveillance is necessary. Society should be able to prosecute criminals such as murderers, slavers or kidnappers.
With these new categories, the compromise suddenly comes within reach, which we have desired in the first step, but rejected as impossible: It could be that something is private enough for everyone, because it prevents mass surveillance, but not private enough for criminals, because it allows observation. Let's take another look at how private Bitcoin really is.
The blockchain does not know real names
The blockchain is not anonymous, not at all. But she is a pseudonym. This means that it does not store names or other data that directly indicates the physical identity of users. This is bad for mass supervisors.
All the popular mass surveillance platforms, the NSA, Google, Facebook or PayPal - they store the names and IP addresses of their customers in a database. That's what makes mass surveillance so terrible: it connects the physical identity with the virtual footprints.
Bitcoin has no physical identity. The blockchain does not understand them and can not verify them. All that validates a blockchain is public keys, signatures, and addresses. In order to form something that is even halfway useful for monitoring and observation, one must connect this data with other, external data, such as the databases of exchanges or Internet providers.
As long as the privacy laws are intact, they prevent the automatic exchange of data between such institutions and supervisors. In this case, Bitcoin is fairly safe from any form of mass surveillance unless users publicly connect their identity to a Bitcoin address on the Internet.
Blockchain analyzes are unreliable
But even if the supervisors have access to the archives of exchanges and Internet providers, mass surveillance is still very difficult. As a basis, she must continue to use the data on the blockchain. These are usually prepared by the technology of "wallet clustering". This makes it possible to connect different addresses that belong to a wallet and thus to identify the wallet of a person or entity.
But this technique has limitations and weaknesses:
- If you create a new address for each transaction - as every good wallet does - you usually can not identify the whole wallet.
- It is impossible to tell with certainty whether a transaction I send goes to myself or to someone else.
- It is impossible to tell with absolute certainty which of the outputs is the payment and which the change is.
- You can easily increase your privacy by selecting the coins in the wallet individually or using different wallet files.
The extent to which these factors affect the quality of wallet clustering data depends on how well the wallet manages the inputs (coins) and how well the user knows. Without a doubt, there is still much to do to improve the privacy of inexperienced users. But that does not change the fact that these limits exist today.
The data coming out of wallet clustering will never be reliable. They are full of "false positives" - ie false hits - while they only include a part of the "real positives", the real hits. For observers this is not a problem. They are used to dealing with unreliable data and sharpening it through investigations: they interrogate people, request documents from companies, and so on. For them Bitcoin is an excellent source, a good starting point to follow the streams of money.
For mass supervisors, the benefits are limited. Without further investigation, the data is not really useful. You may be telling something about some people - but never all about everything, as the mass supervisor demands. Non-pseudonymous systems - such as data transmission over the Internet - provide reliable data about everything. They are much better suited for mass surveillance than the pseudonymous blockchain.
A blockchain researcher like LaurentMT has been working on blockchain analysis for years, running his own public explorer that links addresses. He explains that his work has taught him a lot about "the boundaries of analysis platforms".
The third step is that Bitcoin can meet the compromise we initially sought but rejected: it leaves its users with privacy and prevents mass surveillance - but helps law enforcement detect criminals.
Bonus Step: Why not privacy, but transparency is the real revolution
At this point, we might speculate on whether Bitcoin is not the perfect compromise: privacy for citizens, but transparency for criminals.
But this is just the beginning. Because the benefits of transparency go far beyond the opposition of "good citizens - evil criminals". Transparency not only helps the state and the ruling class to oversee and control the weak, deviants and powerless. It also becomes a sharp weapon in the hands of the weak. Transparency exposes all evil in the circles of domination: oppression, robbery, corruption, lies, murders.
Human progress towards a freer and more peaceful society has always been accompanied by the knowledge of ordinary people about what rule does. Martin Luther's translation of the Bible made the contents of Holy Scripture - until then closed to spiritual rule - transparent; the enlighteners of the eighteenth century made the values and structures of the state transparent; and journalism is not in vain considered a pillar of democracy because it makes political processes and actors more transparent. And so on.
A system like Bitcoin is not only bad for the ruling powers, because it makes it difficult to monitor the masses - it's bad for them, above all, because it allows the masses to oversee the rulers. The ruling class is much less afraid of people using Bitcoin - but of having to use it themselves. Bitcoin brings to light all the bad things that should be hidden in the intertwined private-state circles of domination: mismanagement, embezzlement, fraud, manipulation, bribery and so on.
Bitcoin's story is rich in examples. Here are just a few:
- When the US government sold the coins he had seized from Silk Road, the entire chain of transactions was publicly known and testable: from Silk Road to the FBI and from there to Tim Draper and the other bidders. Imagine, this happens with taxpayers' money.
- After Mt. Gox imploded, a multi-year investigation into the flow of money led to the stolen coins. Even before, many abnormalities had been publicly observed, discussed and documented. It's impossible to hide such a large amount of coins on the Blockchain.
- When Quadriga reportedly lost the keys to the Cold Wallet, public blockchain analysis indicated that the Cold Wallets did not exist and that the stock market's coins continued to move thereafter. In banking, such events hide behind the opaque ramparts of the account. With Bitcoin, it is impossible for a company that makes many transactions to be publicly recognized.
There are many more examples. Privacy is just one - and perhaps less relevant - reason why Bitcoin is a revolution. Transparency is the other. Currently it is possible to watch everything through Internet traffic - but the data is exclusive and behind closed doors. They are hidden from the public by the walls of states and large corporations. Bitcoin makes such data transparent to everyone.
And that is what worries the ruling powers a lot more: they are more afraid of standing in the light themselves than their people disappearing in the dark.