Anonymous cryptocurrency wallets are not that simple

Disclaimer: The author of this article: Molly White, the translator: the old yuppie who is not on the DAO. This article aims to explain some privacy and security leakage problems caused by the current cryptocurrency exchange into legal currency, which cannot be solved by anonymous wallets. my country’s laws strictly conduct cryptocurrency transactions and OTC exchanges. Readers are requested to abide by my country’s laws and be a law-abiding qualified citizen. This article is authorized and forwarded by the public account “Old Yuppie” laoyapicom.

In “Abuse and Harassment on the Blockchain”, I wrote about some of the drawbacks of public ledgers, which are especially severe if a wallet is publicly tied to a person’s true identity. One solution that is often proposed to this problem is that users can create multiple anonymous wallets for transactions that require more privacy, a topic I want to dive into.

level of anonymity

A cryptocurrency wallet is identified by a string of characters, such as
0x3781d92e5449b5b689fee308ded44882085b6312. Nothing intrinsically connects a person to a particular individual, although these connections may exist to varying degrees. At the broadest level, it is publicly known that a person controls a particular cryptocurrency wallet, sometimes through self-disclosure or through the results of investigative work. There is also the case where the owner of the wallet is not known to the public, but is known to the company: for example, in order to create a cryptocurrency wallet using the popular Coinbase service, an individual must verify their identity with the company in order to meet anti-money laundering regulations. Purpose (called KYC, or “know your customer”2). The information is kept confidential by Coinbase and is not tied to account disclosure, but law enforcement can request it. Finally, there are various ways someone can create a cryptocurrency wallet without revealing their identity to a company or service, and additional measures such as the use of proxies to further obscure their identity.

Currently, it is fairly trivial for a person to operate anonymously on Layer-2, and their identities are known to various companies (and law enforcement, if required), but not publicly. But Layer-3, or so-called true anonymity, is what cryptocurrencies have promised from the very beginning: no government and legal system interference, no one telling you if you can send or receive money based on your identity, no ability to exchange transactions Connect with individuals. And that level is becoming more and more difficult to achieve.

Fund an anonymous wallet

As I’ve written before, the real challenge of anonymity doesn’t come from creating a new wallet. It comes from funding that wallet without linking it to an identifiable source.

mining

In the past, 3 someone could simply mine out some bitcoin or ether and they could use the new coins without any shackles because they just came out. However, the whole idea behind proof-of-work chains like Bitcoin and Ethereum is that the coins become harder and harder to mine over time. Ten years ago, people could reasonably set up their PCs to mine when they weren’t using it, and now, one is competing with huge mining farms with sophisticated specialized equipment.

While it is no longer feasible for a person to attempt to mine Bitcoin or Ethereum alone with a personal computer, there are technically (though not recommended) ways to do so — usually by sharing computing resources with others. As of November 2021, the average cost of electricity for a U.S. residential home is about 14 cents per kilowatt-hour. 4 I have a pretty decent desktop computer, albeit several years old, with a GTX 1070 Ti graphics card, and if you’re mining ethereum, it’s 27-30MH/s (depending on who you ask). Subtracting the electricity bill, I can dig a good profit of about $0.84 per day, but this is assuming a best-case scenario where the graphics card runs at 100% speed for 24 hours without overheating. Assuming my GPU doesn’t melt, in four months of mining 24 hours a day, I might have $100 of ETH to play with, of course based on huge assumptions about price and mining difficulty stability. If a person doesn’t happen to have a sizable dedicated GPU to play like I do, they’re lucky to break even on their electricity bill, and could actually lose money. Even if they were willing to take a loss to get a token with no transaction history, it would take them a long time to do it.

Convert US Dollars to Cryptocurrencies

Now that the “only mine new coins” problem is out of the way, let’s talk about the more common ways of trying to fund new wallets. If someone has cash around, how do they put it into their fresh anonymous wallet without tying it to themselves? There is no shortage of services where they can connect their bank accounts and buy the cryptocurrency of their choice, but once their bank account is involved, they lose their anonymity.

If they live in an area with a large population, they may choose to walk to a nearby Bitcoin ATM5, but they also face challenges here. Crypto ATMs are still regulated, assuming they can tolerate huge transaction fees (usually 10-20%). If they’re lucky, they might find an ATM that doesn’t require much identification (though often at the expense of higher fees), but many of these ATMs require at least a phone call, if not photo proof number, and the larger the transaction volume, the more identification is often required.

Another option is to meet someone and hand them cash in exchange for cryptocurrency. Needless to say it was a risky attempt for a number of reasons, not least the ownership of the currency they now have, whose past history may be attributed to them, unless they manage to convince law enforcement that they really handed one to someone in the park A suitcase full of cash in exchange for some bitcoins, of course only after he’s done shady things with it.

transfer existing cryptocurrencies

Cryptocurrency transactions on these popular blockchains are publicly recorded, so transferring funds from existing known wallets is impossible when trying to remain anonymous. A person can convince a friend to transfer funds, but then the wallet is just tied to their friend.

Perhaps the best way to transfer an existing cryptocurrency without being linked back is to use a cryptocurrency tumbler (also known as a “mixer”)6. These services attempt to break the link between source and destination wallets, pooling together large amounts of currency from many sources and then distributing it to destination wallets at random times. While it is possible to see one wallet make transfers to the mixer and another receive transfers from the mixer, it is difficult to link the two due to the amount of funds going through these services and the randomization involved. However, this is becoming rarer as more sophisticated technologies are being developed to make it easier to unwind tumbling funds.

use these funds

So let’s say a person has managed to get the money they need into their anonymous wallet without associating it with themselves. They are gold, right?

Well, not quite. Let’s make a bold assumption that this person is able to continuously create and pay the fees required to create and pay anonymous wallets, and in perpetuity. They will never confuse it with their other wallets and make an unwise transaction that can be linked to them, they will never make enough transactions that can be compared to their known behavior and used to infer A link, they will never use this address in many services that require KYC self-identification these days, and they are always careful to use a privacy-focused VPN7 when accessing web-based encryption services so that their real IP is not will be recorded.

now what? Well, if they are holding the cryptocurrency for its speculative value, they will have no problem – it will just stay in the wallet, gaining or losing value depending on the performance of the given currency. If they want to trade in the cryptocurrency space, like exchanging one cryptocurrency for another, or exchanging it for other crypto-based assets like NFTs, they might have a little problem.

However, we have started to see more and more frequently that users of wallets with anonymous funds are having great difficulty getting their cryptocurrencies back and exchanging them for traditional currencies. It’s not particularly easy to find someone willing to hand you a wad of cash in exchange for your cryptocurrency, but it’s still not the core issue. For those willing to dig deep into Darknet 9, it may be easier, although there is little risk.

While DeFi platforms already allow transactions between various cryptocurrencies without self-identification, there are relatively few platforms that actually allow you to cash out for traditional currencies, and those that do are getting less and less used.

It is this “gateway problem” that is holding back criminals and legitimate users of cryptocurrencies. The identity of Bitcoin’s pseudonymous inventor, Satoshi Nakamoto, has remained unknown for nearly 15 years, largely because they didn’t try to do anything with their large holdings of Bitcoin. Satoshi Nakamoto disappeared inexplicably in 2010, and the 750,000 to 1.1 million BTC they held has not been passive, despite its current value in the tens of billions of dollars. The perpetrators of large cryptocurrency hacks have a hard time monetizing their cryptocurrency if they don’t dump it right away (and the bigger the amount thrown, the more challenging it is), and some of the ill-gotten gains of some of these hacks are just a few years later. Sleep or dance in the cryptocurrency ecosystem.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/anonymous-cryptocurrency-wallets-are-not-that-simple/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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