Pseudonymity not Anonymity

Published by Mario Oettler on

Blockchains are not really anonymous. Instead, they are pseudonymous. Of course, you can create as many address/secret key pairs as you like without asking anybody or registering anywhere. But still, each address acts as a pseudonym for you. And as soon as there is a link between an address and you, all transactions made from this address and to this address can be linked to your real-world identity too.

This can happen in two common ways.

  1. When starting with cryptocurrencies, you probably go to an exchange and buy a certain amount of Bitcoin for Euro or USD or any other currency. Most exchanges require a KYC (know your customer) process where you have to provide your name, e-mail, phone number, and passport or id details. After buying your coins, you want to withdraw them to your (non-custodial) wallet. This means you send the coins from the exchange to an address where you own the private key. And now the exchange knows who this address belongs to.
  2. If you want to buy something and pay by Bitcoin, you have to give your shipping address. And that’s again a situation where a link between your identity and your Bitcoin address is created.

An important feature of blockchain is that all data are publicly available. You create a transaction and send it to some node that broadcasts it to the network. This is the first time where your address, the receiver’s address, and the amount spent get public.

Then, a miner receives your transaction, takes it into a block, and appends this block to the blockchain. And since the blockchain is public and can be downloaded by anyone, all transactions are public too. You can check this by using a blockexplorer like:

So, every transaction you create is known by everyone.

Nothing is Encrypted

Another misconception is that the data in the blockchain is encrypted. That’s downright nonsense. In Bitcoin, Ethereum, and most other major blockchains, all data are there in plain text.

Maybe you have heard of so-called privacy coins like Monero or ZCash, where sender, receiver, and amount are hidden. That’s true. They exist, and they are a great way of preserving privacy. But so far, they lack wide adoption and are more niche products. Maybe one day, this chapter can be rewritten and saying that data in blockchains are private and anonymous. But for now, that’s simply not the case for most of the blockchains out there.