One of the biggest misconceptions about cryptocurrency is that it is private. The Bitcoin network, like many of the major blockchains that are popular, is a publicly distributed ledger, meaning anyone can see what is happening on the network.
Public blockchains are not private
Public distributed ledger technology is basically a giant transaction history of all economic activity on a particular blockchain that can be used by anyone for anyone to see and use as they see fit.
Imagine if a big bank like JP Morgan or Wells Fargo published all transactions on all their accounts so that everyone could see who was watching – and give everyone around the world free access. That might upset a few people and seem radical, but that’s pretty much what happens on public blockchain networks like Bitcoin and Ethereum. It’s an experiment in radical transparency, and some see it as a feature of this technology, not a drawback.
Pop culture and some government officials use cryptocurrency as the standard for secrecy in financial transactions, but this is a misunderstanding of how this technology is used. Let’s take a look at the nuances of anonymity versus privacy regarding cryptocurrency networks such as Bitcoin and Ethereum.
Public blockchains are built to be transparent
Blockchains as used in cryptocurrency are public distributed ledger technology. You can imagine a huge database that keeps track of all the credits and debits on the network. It is called a blockchain because each set of transactions is collected in a block.
Those transactions must be validated through a trust layer to ensure that they are accurate and that there is no fraud or corruption. This is done using a consensus mechanism that checks the correctness of the transactions going through the system. When all transactions are validated, the block is added to the chain and becomes part of the data encapsulated on the network.
Because one of the central goals of blockchains is to provide trust, the entire chain is made public so that everyone can see, monitor and verify the accuracy of the blockchain. This means that everyone has the opportunity to see the state of the blockchain.
One way to observe the activity on a particular blockchain network is to use that network’s block explorer. For example, on Ethereum, Etherscan.io is the most widely used block explorer. You could think of it as a giant Google search engine for all data on the blockchain network, which also includes every transaction ID and all its metadata.
Transparency is a core value of the Web3 community
One of the values of the crypto community is that everyone should be able to verify the activity in the chain. Because there is no central authority to decide what is true and accurate, this trust is derived from the community of miners or validators who control the chain using a specified mechanism to reach consensus.
Because transparency is built into the architecture of the public blockchains like Bitcoin and Ethereum that we use today, the data on them is completely open and available to the whole world to do with it whatever they want.
There is no governing body as to how and for what purposes this data may be used. In addition, this vast amount of data is a source for many business models that make their living by analyzing the data for certain use cases and purposes.
Anonymity vs. Privacy
While a degree of anonymity is possible, privacy is not. An unknown wallet address can be publicly observed. Over time, based on the transaction history, some experienced users can decipher who owns an anonymous wallet or at least make educated guesses. There is an entire industry based on blockchain forensics to study exactly this topic. This further illustrates that lack of privacy when using public blockchain networks.
Developers are working to make more privacy solutions available, and alternatively you can transact on a private blockchain, which is often what large companies and enterprises use for their internal business processes.
However, many privacy solutions are not enough. More work needs to be done in this arena. Also, many governments do not want to see privacy solutions that can be used to circumvent the regulations they want to apply to digital assets and cryptocurrency.
Broadcast your financial activity
It is important to understand that your blockchain activity is not private and transactions on public blockchains essentially broadcast your financial activity to the internet. Transparency is part of the crypto community’s ethos and is reflected in the way blockchains are designed and verified.
Keep in mind that there is a difference between anonymity and privacy, and you can have an anonymous wallet with transaction data publicly available. Efforts are being made to improve privacy, but these are not sufficient at this time. It is crucial to be aware of this when dealing with cryptocurrency.