Being Private with your Bitcoin
Being Private with your Bitcoin
Bitcoin’s blockchain is known as a transparent distributed ledger organized as a chain of blocks whose data is cryptographically verified data without trusted parties. Bitcoin is the innovation and a superior monetary system is the goal, it’s blockchain is just a means to an end. The blockchain is simply a tool to achieve the property of validation that Bitcoin requires to reach its purpose, to become a superior monetary system to any that has ever existed on the surface of earth before it.
Tools can and should get replaced or modified whenever superior and more secure alternatives appear, if it becomes clear that the objectives can be achieved in a better way and if consensus arises through the p2p network of nodes and the off-chain governance.
The mission is not a more “open” world through the use of publicly available transaction histories - Bitcoin is the innovation and a superior monetary system is the goal. Privacy properties are thus necessary for Bitcoin to prevail, since by studying history, we can observe that fungible systems are the ones with the most success in a free market.
Maintaining financial confidentiality is crucial for maintaining individual freedoms. Whether this aspect is used for activities that are deemed illegitimate by others is of no importance, since this same component also helps defend those that are harmed by others with greater resources than they.
There are a myriad of vulnerabilities that a user can face when interacting with their Bitcoin.
This article will focus on the best practices and tools to adopt when using and storing Bitcoin, so that you can achieve greater degrees of independence and privacy. There are 3 areas that one must pay close attention to in order to improve their privacy-preserving use of bitcoin that will be covered:
We’ll dive into each one, lay out the vulnerabilities one normally faces and how to mitigate the privacy-leak risks associated with each one.
Bitcoin’s public ledger of transactions distributed through a p2p network of nodes, which is useful for the participants to validate if their counterparties apply the same protocol rules when executing transactions on the Bitcoin network, has some privacy drawbacks. The main side effect of this data structure is the transparency of all the transactions which gives a huge privacy limit. There are many blockchain espionage companies out there that make a living through the exploit of this factor, at the expense of users.
Here are some current best practices in order to avoid having your transactions tied to your person:
Run your own full node through Tor
Use Coin Control and Labeling
Use a HD wallet
Use a VPN
Run your own full node
If one uses a light wallet, an application which doesn’t run a Bitcoin node but instead connects to another node through the internet, all the user’s information about their account balances will be disclosed to this service provider.
It’s strongly recommended to use a full node for privacy. When running a node, it’s important to use Tor when connecting to the network, else one would disclose their IP address which can easily be translated into a geographical address.
Some available tools:
Coin Control & Labeling
Having coin control as part of your transaction practices helps you avoid transaction graph privacy leaks. This is where heuristics are used to study the flow of bitcoins and extract privacy-relevant information.
When you are sending transactions, you must select the individual coins available in your wallet, also known as Unspent Transaction Outputs (UTXO), that you wish to send. You can select several at a time if the balance you wish to send exceeds the balance of any one coin.
Think of bitcoins as actual physical coins of different amounts in your pocket. When you spend them, you will combine the change, and you will get some new change back.
For every bitcoin transaction you send and receive, it is important to identify who is observing that transaction. This is where labeling becomes an important tool when sending and receiving Bitcoin. The label serves the purpose of making sure that we are aware of who is sending us coins and who we are sending them to. Bitcoin transactions being public, we want to avoid as much as possible revealing our transaction history to anyone that might be keeping track of us.
So for example, if you receive bitcoin as payment for a job you completed, you can write “Bull Bitcoin pay”.
Now, if you want to send coins to someone else, you can use the same coin with the “Bull Bitcoin” label if you wish to sell them on the Bull Bitcoin platform and add the label “Bull Bitcoin sold”, since it is the same observer of that coin, ie. Bull Bitcoin. If however, you wish to purchase something and you do not want your employer to know about it, then you would use a different coin that they are not capable of observing the transaction history.
Both of these tools are supposed to help make sure that your UTXOs remain segregated from one another. You should also avoid merging UTXOs where possible.
A hierarchical deterministic (HD) wallet generates multiple keys from a single private key, however, each one of those keys can also generate their own set of keys and so on to an infinite number of series. Your seed can generate a parent or master key, which can then generate child keys, which can then generate grandchild seeds and so on.
In practice, this prevents you from reusing an address that you’ve used in the past to receive bitcoin. You want to avoid revealing part of or all of your stack, and use of your funds to third parties. Most wallets have this implemented already, however some might be tempted to share an address that they’ve shared with others already, whether or not they have received funds in them, thus weakening their privacy.
Anonymity isn’t given in Bitcoin, many efforts have to be taken for one to break the heuristics of the Blockchain Analytics companies that wish to deanonymize users. The main and most effective technology in the bitcoin ecosystem currently available is CoinJoin. It consists of mixing an amount of coins owned by a user with a few more user’s coins of the same quantity and then distributing them in different ways but in the same quantity. This technique doesn’t completely break the link between the transactions but reduces the probability of being de-anonymized. Coinjoin is not to be confused with the Centralized Tumbler Mixing technique which required users to send their coins to a website who then sent back different coins but of the same value. This method remains popular even though it has a major risk: the Centralized Tumbler website can simply steal the coins.
This is a special type of CoinJoin in which one user would pay another. They would cooperate to create a single transaction in which their coins would be mixed, thus masking the payment amount.
Blue Wallet will automatically detect when paying to a third party who is also PayJoin compatible and prompt you if you want to make that type of spend.
Zerolink is a CoinJoin-type protocol where there is a central server that coordinates the CoinJoin mixing transactions between participants who never interact between themselves, thus can’t de-anonymize themselves. The central server never receives the coins, he only batches the inputs to create the big transaction, so he can’t steal coins as a Centralized Tumbler mixer would. It also communicates with blind signatures for their output addresses, which basically allows them to preserve anonymity from the central server as well. This protocol has been developed by Adam Fiscor, Lead developer of the Wasabi Wallet.
Wasabi Wallet is an implementation of Zerolink as a desktop wallet developed in C# on the .NET Framework, so its native platform is Windows but also available on Mac and Linux. It is very easy to install and has a great GUI. It is developed by zkSNACKs Inc. but is an open-source project that anyone can contribute to. The coordinator takes a fee and there are also the mining (transaction) fees to take into account.
Wasabi implements forced address change which means that whenever we want to receive coins, a new address must be generated.
Another privacy feature of Wasabi is coin control. It forces Tor usage on the backend, so a user wouldn’t even have to be aware of it and doesn’t have to turn anything on.
It’s a light-client, which means that it’s not a full validating node so it has to rely on other full validating nodes, but a compact block filters client-side verification, which means that it asks so much data to bitcoin nodes that its addresses can’t get deanonymized through network analysis but it does so in a compact way so that it is still considered a light wallet. It interacts on the p2p layer as a regular light wallet, unlike API wallets that communicate to only one server. It also links to your own bitcoin node if it detects it running on the P2P network and on the localhost.
Don’t Use Block Explorers
They’re softwares that will treat and index the blockchain so you can look up different network statistics in a user-friendly format. All of them will also include a way for you to look up specific addresses, transactions or blocks through a simple search bar.
If someone is listening to your web activity when you use a public blockchain explorer, they might infer how much Bitcoin you hold if you’re looking up personal Bitcoin addresses or transactions. Block explorers are also used as tools for block analysis companies to obtain more data. For example, the site walletexplorer .com is maintained by Chainalysis.
Also, you have to trust the company or service provider of a particular block explorer for the data it displays to you. It is highly unlikely, but someone could orchestrate an attack by providing you false information through that kind of web service. This can be mitigated by double checking the information you’re looking for in different block explorers.
Don’t Google your Private Information
Google can be a powerful tool for quickly looking up information. However, they are still a centralized company that logs absolutely all of your information.
Looking up relevant information about your Bitcoin on Google will only deanonymize you and your stack.
Don’t link addresses to you on social media
Posting your addresses on social media will allow others to be aware of whatever bitcoin you send or receive from that address. This can lead to strangers figuring out how much bitcoin you might have in your possession by analyzing the blockchain heuristics.
This will only further encourage others putting a target on your back if they deem that the benefits of attacking you outweigh the cost. Avoid sharing this and any other Bitcoin-related information on your social media.
Be careful doing online purchases using Bitcoin
There are third-party web trackers that can deanonymize users of bitcoin. On most online shops, there are third party trackers that receive information about the purchases, mainly for advertising and analytics purposes.
However, when paying a bill in bitcoin, trackers can also possess enough information to uniquely identify the transaction on the blockchain, link it to the user’s cookie, and further to the user’s real identity.
If a tracker can link two purchases of the same user to transactions in the blockchain, it can then identify an entire cluster of addresses and transactions. After a user shops on merchantA.com the tracker is unable to determine which of the three wallet clusters belongs to the user. But after a second interaction with the same user on merchantB.com, the tracker simply finds the intersection of the two sets of clusters, which leads him to a unique cluster.
These kinds of deanonymization attacks are passive, thus they can be applied retroactively to past purchases.
Trackers can compile profiles of users’ activities across the web. The user being identified by the user’s cookies or other personally identifiable information.
Payment processors for merchants, like BitPay and Coinbase, leak the URL of the invoice to third parties. A tracker can then link payments from users with the receiving address.
BitPay also rounds its transaction amounts to a multiple of 100 satoshis. Since the adversary knows the identity of the payment processor, whenever that processor is BitPay, he can eliminate a large fraction of possible transactions.
Web trackers passively observe users’ web purchases and are able to link them together, via cookies or device fingerprinting, even if the merchant and payment processor are different in every case.
In order to mitigate this kind of threat, there are a few tools at your disposition to block trackers:
Using CoinJoin with a high anonymity set can help greatly reduce the odds of a malicious tracker from figuring you out.
Use a Virtual Private Network (VPN)
You route your internet traffic to a server before reaching your destination. The destination thinks that the server made the request and not you. This helps mask your activity from your Internet Service Provider. However, you do place trust in the service provider.
Some reputable VPN providers:
You can also host your own server by using a service like https://host4coins.net/.
Use PGP Encryption
Avoid sending messages (like your bitcoin address) through unencrypted messaging services. Encrypt all of your messages and sign them with your unique digital signature (PGP key). Here are a couple of resources to get you started:
Dealing with the physical world can be much more messy since you’re interacting directly with other human beings. They can pose a threat to both your physical and mental wellbeing if they wish to take your bitcoin. Thus, you must be extremely careful with whom you confide in and what information you provide.
Don’t talk about your Bitcoin
The best way to avoid anyone from doubting that you are in possession of bitcoin is to not talk about it. This is especially important when it comes to people that you do not know or have no way of vetting or trusting them.
Avoid telling random people relevant information about your stack, such as when you began buying bitcoin, how much you have or how you store it. No one needs to know this as it will only encourage those that are more malicious to target you and your bitcoin.
More often than not, it is those nearest to us that end up getting their hands on our bitcoin. You must also be careful as to how you store your backups and how many details you reveal to those closest to you.
It is best to avoid flagrantly displaying your affection for bitcoin and garnering the attention of people that you do not know. This would include having it displayed on your gear.
All in all, maintaining your privacy when using Bitcoin is an ongoing process. There is no single solution either that will protect you indefinitely. Remember to keep maintaining the good practices mentioned throughout this article so you don’t fall prey to deanonymization.
If you need help in improving the privacy of your bitcoin holdings, feel free to book a CoinJoin session through Bitcoin Support or consult our free guide!
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