Bitcoin’s Growing Anonymity May Be A Threat To Privacy Coins

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Bitcoin, as it is, doesn’t offer complete transaction anonymity.

Being pseudonymous, it means that transactions remain vulnerable to blockchain spies, intelligence agencies and governments. All these parties can trace transactions to specific individuals, if they are savvy enough and know what to look for, or at.

Though not 100% anonymous, the degree of privacy Bitcoin has offered users has steadily increased over recent months, especially with the use of newer coin-mixing services and other add-ons.

Yet, with the improvement in Bitcoin’s privacy, there emerges the likelihood that out-and-out privacy coins like Monero, Zcash, and Dash could get weakened.

It is possible that if Bitcoin manages to offer the anonymity users crave as well as be a better store of value; its impact would be on privacy coins where such altcoins’ popularity would diminish to a point usage dwindles and community support reduces significantly as well.

Bitcoin has the potential to be a threat to some of the privacy coins.

That notwithstanding, the probability of this worst-case scenario has been downplayed by developers on both sides who have termed it a highly unlikely eventuality.

The basic call is that many of the privacy-oriented altcoins hold some technological advantages that Bitcoin lacks, even if mixing services are coming in to benefit users.

Another pointer is that the crypto market isn’t “a zero-sum game,” and that the sector is big enough to accommodate various coins that can still benefit from growing adoption.

Greater privacy for bitcoin

You would only need to know about Silk Road or its jailed founder Ross Ulbricht to note that it is very much possible to trace and identify a bitcoin user via blockchain forensic work.

In fact, Pennsylvania State University researchers were able to map over 1000 BTC wallets through analysis of IP addresses and data flow on the bitcoin network. The NSA was rumored to have identified some bitcoin users via blockchain research.

The suggestion here is that bitcoin’s privacy is far from being perfect. However, the launch of several services, solutions and plug-ins are ramping up user protection.

CoinJoin is one such service that recently marked a major milestone by conducting a single 100-person transaction. The transaction was in conjunction with Wasabi Wallet, a privacy-focused that helped mix the payments.

Wasabi Wallet says that mixing contributed 4.09% of Bitcoin transactions by April this year. Importantly, the use of mixers surged by more than 300% over the previous 9-month period to suggest that mixing services have continued to gain popularity among bitcoin users.

The services have also become noticeably efficient at mixing larger volumes of transactions, which could only mean that in the long run, the services are likely to improve even further and attract more users. The potential impact is the overall improvement in bitcoin’s privacy.

But mixing services do not constitute the only channels of increasing bitcoin’s privacy. Other than services like CoinJoin, the community can look to emerging tech like Dandelion, which promises “anonymity guarantees” through its ability to prevent deanonymization.

As described on GitHub, Dandelion will route transactions via randomly selected paths to make it difficult for a bad actor to use tracing to link it to a specific IP address.

Another would be the MimbleWimble protocol, which utilizes both mixing technology and zero-knowledge proofs to allow for “completely opaque” transactions. Already in use on the grin platform, it is possible this feature could be an optional implementation for bitcoin at some point.

There is also the Schnorr signatures that could see added privacy to the bitcoin network.

Generally, these technologies are bound to significantly add more privacy to bitcoin and could take the shine off some of the privacy-focused coins. Bitcoin is already well ahead of coins like Monero and Zcash in terms of users and value and that could increase with more privacy.

Bitcoin has also been attracting a lot more in the form of investment and interest, with the underlying advantage being the potential to see even more efforts to have it feature more privacy-enhancing add-ons.

And there is the suggestion among Bitcoin developers that having such a wide user base could make BTC more private than even the dedicated privacy coins themselves. The thinking is that “hiding” among a huge bitcoin users’ pool is a lot easier than for instance using Zcash.

Privacy coins have also been hit with recent events where exchanges have moved to delist privacy coins.

For example, South Korea’s Korbit delisted up to five privacy-oriented coins in May last year. The move was also taken by Japan-based Coincheck, which delisted another four privacy altcoins.


Disclaimer: This is not investment advice. Cryptocurrencies are highly volatile assets and are very risky investments. Do your research and consult an investment professional before investing. Never invest more than you can afford to lose. Never borrow money to invest in cryptocurrencies.

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