Today I’m talking about crypto privacy. How Bitcoin & Ethereum wallets work to protect your privacy, tools you can use to remain private and why even though you think you’re using crypto anonymously you’re probably not.
Public Blockchain Data
One of the biggest misconceptions about crypto is that it’s “anonymous”. This is only sort of true. Anytime you send or receive bitcoin or ether to an address you can easily lookup that address to see it’s entire transaction history on a block explorer like blockchain.com or etherscan.io.
Sure, your name, address, etc. won’t be visible on the blockchain, but what happens when you tie your identity to an address? Say, when you withdraw from an exchange for example? When this happens, every transaction from that address onwards (and even backwards) can now be tied back to your identity by that exchange and the governments they share their data with.
Exchanges are required by the government to follow Anti Money Laundering (AML) and Know Your Customer (KYC) laws. They’re obligated to follow your crypto transactions for up to 5 hops before deposit and 5 hops after withdrawing! Massive companies like Chainalysis and CipherTrace specialize in blockchain forensic analysis to help exchanges and governments connect crypto transactions with your identity.
Here’s a few ways to help protect your privacy while using Bitcoin:
- Multiple BTC Accounts – Bitcoin wallets allow you to create multiple accounts for separating your bitcoin. You can use account 1 for bitcoin bought directly from other people and account number 2 for bitcoin withdrawn from exchanges.
- Unique Addresses – Every time you receive bitcoin to a wallet address, your wallet will present you with a fresh bitcoin address. You can re-use old addresses, but anyone who knows that address will see your future transactions. Also, when you send bitcoin more bitcoin than you hodl in a single address, your wallet will combine multiple addresses (inputs) which will associate that address with other addresses in your wallet.
- Mixers/Tumblers – Mixers and Tumblers create privacy through obfuscation. They move your crypto around between hundreds of addresses, pooling it, unpooling it and eventually withdrawing to a unique address all for a small fee. This effectively removes the “taint” or disassociates your identity with the original bitcoin. Mixers have fallen out of fashion now that bitcoin transaction fees are much higher making them virtually unusable.
- Coinjoins – The most popular way to “de-taint” your bitcoin is to participate in coinjoins. Coinjoins work by creating a single transaction amongst multiple people who each contribute a standardized amount. For example, 100 people each contribute 1 bitcoin into a transaction which also has 100 outputs of 1 bitcoin each to 100 fresh addresses. So me popular wallets for coinjoining include Wassabi and Samourai.
- The Lightning Network – Once you’ve opened up a payment channel to the Lightning network, transactions are routed between Lightning nodes without leaving a trace.
- Run A Node – Most Bitcoin wallets are “light wallets” meaning they don’t have to download the entire blockchain. Instead, they connect to a node usually hosted by the wallet company. The ultimate way to protect your privacy is to connect your wallet to your own node to broadcast and verify your own transactions.
Ethereum is even less private than Bitcoin! But there are still a few ways you can improve your privacy on Ethereum:
- Multiple ETH Accounts – Like Bitcoin, your Ethereum wallet will allow you to create multiple accounts. However unlike Bitcoin, your account only has 1 address! You can still use multiple accounts for different purposes. For example, Account 1 for savings, Account 2 for NFTs and Account 3 for stablecoin farming.
- dApps – Applications like Tornado.cash allow multiple people to pool their ETH and Tokens in a way that makes them difficult to trace.
- Private L2’s – Some Ethereum second layer solutions like Aztec use advanced cryptography like zero knowledge proofs to shield the transactions.
Other Crypto Privacy Tricks
There are a few other things you can do to help protect your privacy when using crypto:
- Multiple Wallets – Mobile wallets are great for everyday spending and smaller transactions. We like to think about our mobile wallet as a checking account and our hardware wallet as our savings account. Send some crypto to your mobile wallet and don’t worry about privacy there – have fun with it!
- Mix Through Exchanges – This isn’t exactly private, but if you need to move crypto between accounts without tainting the sending account, you can send the crypto to an exchange first. For example, if you want to send 1 ETH from your Ethereum Savings account to your Ethereum NFT account, send the ETH to Coinbase first and then withdraw from Coinbase to your NFT account. This will break the connection between the 2 accounts since Coinbase will withdraw from their wallet to yours.
There are tons more things you can do to protect your privacy when using crypto, none of them are 100% guaranteed. Your best bet is to practice as many privacy strategies as possible and do your best not to associate your identity with your transactions.