Bitcoin right now is not really anonymous . While Bitcoin addresses aren’t necessarily linked to real-world identities, they can be. Monitoring the unencrypted peer-to-peer network, analysis of the public blockchain, and Know Your Customer (KYC) policy or Anti-Money Laundering (AML) regulation can reveal a lot about who’s using Bitcoin, and for what.
This is not great from a privacy perspective. Bitcoin users might not necessarily want the world to know where they spend their money, what they earn or how much they own, while businesses may not want to leak transaction details to competitors – to name some examples.
Additionally, bitcoins being traceable, possibly “tainted,” and potentially worth less than other bitcoins is at odds with fungibility. This could even challenge Bitcoin’s value proposition as money.
But there are potential solutions to increase privacy, and improve fungibility.
One of these solutions is BIP 151 , a Bitcoin Improvement Proposal designed to encrypt data among Bitcoin nodes.
The Problem
Traffic over the Bitcoin network has always been unencrypted. Transactions and blocks are sent from node to node in plain sight, as are Bloom filters , which are often used by Simplified Payment Verification (SPV) nodes. All this data can, therefore, be seen by Internet Service Providers (ISPs), open-WiFi providers and anyone monitoring the Bitcoin network.
This has obvious downsides. In the case of full nodes (and miners), information on where transactions and blocks originate can link Bitcoin addresses to IP addresses, which can be used to de-anonymize users. Moreover, ISPs and open-WiFi providers can potentially use the data to block certain transactions, for instance if they send bitcoins to a blacklisted address.Most SPV-wallets (or lightweight clients – and in particular those based on the Bitcoinj -library) have an additional problem. To check funds, these wallets send out so-called Bloom filters, a mathematical trick that aggregates […]
