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Is Bitcoin Volatility All In The Mind?CoinDesk
The good news is that bitcoin's
association with terrorism and Daesh played a somewhat smaller part in this week's coverage. Although some of the narrative spilled over from last week, and the news did travel far and wide, most mainstream outlets ...
Posted on 27 November 2015 | 10:33 am
Posted on 27 November 2015 | 9:35 am
Posted on 27 November 2015 | 5:23 am
Posted on 27 November 2015 | 5:03 am
Posted on 26 November 2015 | 7:02 am
CoinDesk has rounded up some of the top bitcoin and blockchain-related headlines from across the globe.
Posted on 27 November 2015 | 10:30 am
Lloyd's held a seminar in London last week to highlight blockchain technology to insurance market participants as part of their modernisation plan.
Posted on 27 November 2015 | 9:00 am
Bitcoin compliance startup Polycoin was recently accepted into two incubators, one backed by Citi and the other by Nordea.
Posted on 27 November 2015 | 5:00 am
The Kenyan High Court heard a case brought by bitcoin startup BitPesa against mobile money giant Safaricom two days ago.
Posted on 26 November 2015 | 9:05 am
Get your bitcoin wallets at the ready and prepare yourself for a day of frenzied discounted online shopping. Bitcoin Black Friday is back!
Posted on 26 November 2015 | 5:00 am
The European Union (EU) is years away from implementing a consistent framework for cryptocurrency regulation, according to a new report by SWIFT.
Posted on 26 November 2015 | 4:30 am
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New York bitcoin exchange Coinsetter has instituted a new $65-per-month account fee, a move it says is aimed at offsetting its compliance costs.
Posted on 25 November 2015 | 12:31 pm
The Bank of England has launched a blockchain challenge, offering the winning students the possibility of a six-week paid internship.
Posted on 25 November 2015 | 10:55 am
West Virginia University’s Student Government Association is debating whether to use a blockchain-based voting platform for its upcoming election.
Posted on 25 November 2015 | 10:00 am
Visa Europe discusses why it is using the bitcoin blockchain as part of its new proof-of-concept for the remittance market.
Posted on 25 November 2015 | 7:00 am
Bitcoin industry startups are facing backlash over a new set of articles in which they have been portrayed as pivoting away from the cryptocurrency.
Posted on 24 November 2015 | 1:40 pm
Post-trade services firm Kynetix is seeking to assemble a consortium of commodities market stakeholders to explore the use of blockchain tech.
Posted on 24 November 2015 | 12:05 pm
CoinDesk is holding a public vote as part of its annual drive to select the most influential people in the bitcoin and blockchain industry.
Posted on 24 November 2015 | 10:00 am
Microsoft has added a new decentralized application to its Ethereum blockchain-as-a-service toolkit introduced in October.
Posted on 23 November 2015 | 3:04 pm
Digital currencies could disrupt the ability to central banks to oversee the economy or issue money should global adoption take place, says the BIS.
Posted on 23 November 2015 | 1:51 pm
Australian bitcoin firm Bitcoin Group is hiring a bitcoin expert after the country's top regulator raised concerns about its forthcoming IPO.
Posted on 23 November 2015 | 10:51 am
Wealthcoin founder Simon Burns discusses what he's learned trying to raise seed capital for his latest bitcoin startup.
Posted on 22 November 2015 | 8:01 am
CoinDesk goes under the hood of Nasdaq's first blockchain product Linq, a platform for private shares trading.
Posted on 21 November 2015 | 7:57 am
With Mike Hearn taking a step back from Bitcoin development to work for private blockchain startup R3, former Bitcoin Core lead developer Gavin Andresen indicated he might take over the lead of Bitcoin XT, the Bitcoin implementation programmed to increase the block-size limit through BIP (Bitcoin Improvement Proposal) 101.
Andresen, who shifted his efforts to Bitcoin XT earlier this year, told Bitcoin Magazine, reluctantly: “I might take over lead of XT, but I don't want to.”
It was announced last week that Hearn recently joined R3 as lead platform engineer, where the Google veteran and Bitcoin XT lead developer will work with some of the world's largest banks on distributed ledger-based protocols for global financial markets. Hearn confirmed to Bitcoin Magazine that he will do the minimum required to keep Bitcoin XT running, but won't actively develop or advocate the implementation any longer.
Hearn, a staunch advocate of a block-size increase in order to allow for more transactions on Bitcoin's network,implemented BIP 101 into Bitcoin XT this summer. With this patch, designed by Andresen, Bitcoin XT is set to increase the maximum block size to 8 megabytes if a threshold of 75 percent of mining power accepts the change. Once activated, this limit is set to double every two years.
On Reddit, Hearn detailed:
The implementation of BIP 101 in Bitcoin XT without industrywide consensus was considered controversial by many, in particular among the Bitcoin development community. Shortly after Hearn implemented the patch, however, several prominent Bitcoin companies stated their intent to upgrade their code to support BIP 101 by December of this year. As such, the timing of Hearn's departure could have been experienced as unfortunate by supporters of a rapid block-size increase. While the Bitcoin industry could still adopt Bitcoin XT, this seems unlikely with no active lead development.
Success of Bitcoin XT might therefore depend on Andresen taking over as lead developer, Hearn acknowledged when asked by Bitcoin Magazine. This idea – which was previously advocated by Coinbase CEO Brian Armstrong – was not dismissed by Andresen, though he is not keen to take such a step. Andresen, who is currently on MIT's payroll, explained:
“I might take over lead of XT, but I don't want to. I stepped back from lead of Core because I got tired of the constant trivial decision-making needed to lead an active open source software project. I want to spend my time thinking about and working on bigger, longer-term issues; like: 'What are the benefits and risks of increasing the maximum block size?'”
BIP 101 itself currently garners little support among the Bitcoin development community, and seems very unlikely to be implemented in Bitcoin Core. Regardless, Andresen does expect that BIP 101 might be adopted by the industry at large. Either through Bitcoin XT, or by miners, companies and other users implementing the patch in their own software.
“It depends on what comes out of the big Hong Kong meeting,” Andresen explained. “If the other developers can't make up their minds and reach consensus on a solution, then we'll have a messy, chaotic couple of months where companies and big mining pools or miners pick sides until a solution emerges. Though, in that case, I do expect that the most likely solution will be BIP 101, since it is the only solution with well-tested code they can download and run.”
Photo Web Summit / Flickr(CC)
The post Gavin Andresen: I Might Take Over Lead of Bitcoin XT appeared first on Bitcoin Magazine.
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Coinbase has introduced the first U.S.-issued bitcoin debit card, the Shift Card, in partnership with Shift Payments. The Shift Card is a Visa debit card that currently allows Coinbase users in 24 states to spend bitcoin both online and at physical points of sale at more than 38 million merchants worldwide.
“Merchant adoption has come a long way over the past few years, but it’s still difficult for people to make regular purchases with bitcoin,” notes the Coinbase announcement. “Buying gas at a local gas station or groceries at a neighborhood grocery store with bitcoin has not been possible in most cities in the U.S. Thanks to Shift Payments, it’s now possible to use bitcoin to buy gas, groceries, and much more. With the Shift Card, you can now spend bitcoin anywhere in the world that Visa is accepted.”
Coinbase users living in the states where the service is available can order a Shift debit card for $10 and link it to a Coinbase wallet. When the Shift debit card is used to make a purchase, the equivalent value of bitcoin (based on the current spot price of bitcoin on Coinbase) is debited from the user’s Coinbase bitcoin wallet. For certain transactions, such as gas purchases and dinner bills, Shift will debit more than the purchase amount, and refund the remainder to the user when the final payment amount is settled.
There are no annual fees, no bitcoin-to-dollar conversion fees, and no domestic transaction fees. Coinbase says there are no domestic transaction fees “for a limited time,” which seems to indicate that domestic transaction fees could be added in the future. There is a $2.50 ATM fee and a 3 percent international transaction fee. The daily ATM withdrawal limit is $200, and the default daily spending limit is $1,000.
The card isn’t available to users in New York, Florida, and many other states. Coinbase and Shift Payments say that they are working through legal and regulatory matters in the states where the Shift Card is not yet available.
Shift Payments wants to integrate all payment options available to a user in one debit card. Users can connect a Shift Card to multiple accounts to seamlessly spend all supported payment means, including digital currencies, with the same card.
“The Shift Card works like any debit card today,” notes the Shift website. “Connect your existing accounts and spend Coinbase or Dwolla, immediately and directly, everywhere Visa is accepted.”
The Shift card isn’t the first bitcoin debit card, but the availability of a Visa-branded bitcoin debit card from a major bitcoin exchange and wallet operator is likely to represent a quantum leap in the space.
“At the end of the day, what we’re trying to do is make bitcoin easy to use,” Coinbase vice president of business development and strategy Adam White, told Wired. “We want to make it easy to buy and sell bitcoin, and we want to make it easy to spend. A mainstream debit card based on bitcoin is a key element.”
Of course all U.S. bitcoin users already can spend their bitcoin by converting them to dollars and sending the dollars to their bank accounts, but the process is lengthy and probably overly complex for some users.
Therefore, the Shift Card is likely to make Bitcoin much more useful in daily life.
Wired notes that existing Coinbase customers are now likely to start spending more of their bitcoin, rather than just speculating, and new customers will be attracted to the digital currency because they can more easily spend it. Then, merchants will be more motivated to start accepting bitcoin, which could start a runaway feedback loop that will boost the Bitcoin ecosystem.
The post Coinbase and Shift Payments Introduce a Visa-branded Bitcoin Debit Card That Works Everywhere Visa is Accepted appeared first on Bitcoin Magazine.
Bitcoin requires decentralization of miners (or mining pools) and full nodes to achieve what some consider its core property: censorship resistance. As such, the block-size dispute represents a trade-off. Bigger blocks allow for more transactions on the Bitcoin network, but take more time to propagate, favoring larger miners and pools, while the increased data transmission disincentivizes users to run full nodes.
Fortunately, there are proposals to increase Bitcoin's efficiency that reduce the risk of bigger blocks. One of the most promising innovations in this regard, are Invertible Bloom Lookup Table, or IBLTs. First introduced by Bitcoin XT and Bitcoin Core developer Gavin Andresen, this idea was picked up and is currently worked on as a side-project by Linux veteran and Blockstream's Lightning Network developer Paul “Rusty” Russell.
“If we can make this work, it means less bandwidth requirements and less block data, which should be good for network health all over,” says Russell.
So what problem do IBLTs solve?
Typically, all Bitcoin transactions are transmitted from node to node over the peer-to-peer network, to be stored by the mempools (the record of unconfirmed transactions) of individual nodes. When a miner finds a block, it includes (some of) these transactions in that block, and subsequently transmits this block over the same peer-to-peer network. Of course, this means that all transactions in the block are effectively sent over the network twice: once as a transaction, and once as part of a block.
Speaking to Bitcoin Magazine, Russell explained:
“We've got redundancy in blocks. Most nodes already know some of the content in that block; they have already seen it. If we can optimize that, we can speed up block transmission. That decreases centralization pressure because miners can get their blocks out faster, while the network works better ... it's all good.”
The Magic of IBLTs
The main problem – the reason we need IBLTs to solve this problem (rather than a straightforward compression algorithm) – is that the set of transactions included in blocks is often not exactly identical as those stored by the mempools of all individual nodes; the biggest difference being the latest transactions transmitted over the network before the block was found. Moreover, the mempools of all individual nodes usually differ from each other a bit, too. This makes it hard to know which transactions a miner included in the new block, without seeing the whole block.
That’s where IBLTs come in. IBLTs combine several mathematical tricks to enable set reconciliation. As such, they basically allow for two slightly different mempools to be compared and harmonized, without actually needing both mempools in full.
This works as follows:
At first, all transactions included in a block are written into a table, where each transaction starts at a different spot in that table. However, there are many more transactions than there is room in the table, so the result is hopelessly overlapping. This makes the IBLT very compact, but also unreadable and undecipherable for anyone who doesn't have access to any transaction data himself.
Anyone who does have transaction data, however, can compare the overlapping transaction data in the IBLT to his own transaction data by filling up an IBLT with his own transactions using similar logic. If both IBLTs end up looking exactly the same, it means all transactions match exactly.
But even if the IBLTs do not end up looking exactly the same, this can still be helpful, as long as the sets of transactions are fairly similar. In that case, the IBLTs can be compared in such a way that all identical transactions cancel each other out. The “leftovers” in the IBLT, then, can often be used to reconstruct the missing transactions.
So rather than needing to transmit full blocks over the peer-to-peer network, nodes can transmit the much smaller IBLTs instead. This requires less data to be sent around and is much faster.
And it gets better. In Russell's design, not even all of the transactions included in new blocks need to fit in the IBLTs. Instead, connected nodes on Bitcoin's peer-to-peer network fine tune which transactions to send to peers. This could increase propagation time and decrease data usage even more.
“Gavin's original idea was that the miner would produce the IBLT, and send every node on the network the same one,” Russell said. “But when we started playing with the concept, it turned out it's very fast to generate IBLTs. So why not have every node do it? Generate IBLTs per peer, because each node has a much better idea of how close its mempool has been to a peer; they're sending this stuff back and forth all the time.”
Moreover, connected nodes can continually learn to understand each other's behavior. So once a node receives an IBLT from the network, and constructs a valid block out of it, it knows how many transactions it was missing. Additionally, it learned over time how many transactions his peer typically differers from him. That difference – the transactions it had to construct plus the usual difference between the two peers – is what the node will include in the IBLT and send to its peer.
As such, the IBLT system can improve over time, limiting the amount of data to transmit over the network to the bare minimum.
“The IBLT must roughly be twice the data size of the transaction difference,” Russell explained. “So out of all the transactions one node didn't know were in a block, plus the transactions that node thought were in the block but weren't... basically double that, and that's how big the IBLT needs to be. So if the differences are small, it will work really well.
“Ideally, if we can cram this thing into two IP packets,” he said. “We are lightning fast.”
Specific details of IBLTs and Bitcoin can be found on Russell's blog and Andresen’s GitHub contribution.
The post How the Magic of IBLTs Could Boost Bitcoin's Decentralization appeared first on Bitcoin Magazine.
In September Bitcoin Magazine reported that nine global banks were pooling resources to fund R3, a next-generation global financial services company focused on applications of cryptographic technology and distributed ledger-based protocols within global financial markets.
R3 will seek to establish consistent standards and protocols for this emerging technology across the financial industry in order to facilitate broader adoption and gain a network effect, according to an R3 press release.
Several other top banks joined R3 soon thereafter.
Now, five more banks – ING, BNP Paribas, Wells Fargo, MacQuarie and the Canadian Imperial Bank of Commerce – are joining R3, Reuters reports. R3, now supported by most of the world’s major banks (with notable exceptions in China), represents the first high-profile collaborative project to find out how blockchain technology can be used in finance.
Thirty banks across the world are now partnering with R3, signaling a significant commitment to collaboratively evaluate and apply this emerging technology to the global financial system.
“The combined strength of our technology team and the diverse global footprint of our member banks clearly differentiates us and puts us in a unique and exciting position within the distributed ledger space,” said R3's CEO David Rutter. “The R3 collaborative model is the best way to quickly, efficiently and cost-effectively deliver these new technologies to global financial markets. We look forward to welcoming more players to our growing team as the initiative continues to develop and evolve.”
Richard Gendal Brown, IBM's former executive architect of banking innovation, joined R3 in September as chief technology officer. In a recent post on his personal blog, he introduced his senior leadership team, which includes James Carlyle, formerly chief engineer at Barclays Personal and Corporate Bank, who joined R3 as chief engineer, and Bitcoin code developer Mike Hearn, who joined R3 as lead platform engineer. Ian Grigg joined R3 as architecture consultant, and Tim Swanson joined R3 as head of research.
Gendal Brown’s team will focus on the basics of fintech applications for banks and financial firms: “[W]hat properties does a technology platform need to possess if it is going to enable the world’s banks – and other firms – to deploy shared platforms to record, manage and report on their contractual agreements with each other and with their customers? What is the irreducible set of functional requirements we must provide? What are the non-negotiable non-functional requirements?”
A press release on ING Bank's website announced that, by joining R3, ING is taking the next step with blockchain technology to collaborate on research, design, and engineering that will advance innovative solutions for clients that meet banking requirements for security, reliability, performance, scalability, and auditing. ING Group, a Dutch multinational banking and financial services corporation headquartered in Amsterdam, had more than 48 million individual and institutional clients in more than 40 countries in 2013.
“We are very excited about joining the R3 consortium and taking an important step forward in our payments innovation strategy,” said Mark Buitenhek, ING Global Head of Transaction Services. “We want to make the most of what blockchain technology has to offer our customers and the best way to achieve this is through global collaboration. Working together, we will develop innovative banking solutions for our clients with consistent standards and protocols guaranteeing widespread adoption. We are convinced that this initiative brings together unique sets of expertise and experience in electronic financial markets, distributed ledgers and blockchain technologies.”
The rapid rise of R3 shows that the adoption of blockchain technology in the financial sector is reaching a point of no return. On the other hand, it can also be interpreted in the context of the ongoing trend toward appropriation of blockchain technology by the mainstream financial world, which many early adopters and Bitcoin purists consider a disturbing trend.
The post ING and Other Top Banks Join R3 to Take the Next Step with Blockchain Technology appeared first on Bitcoin Magazine.
Bitcoin is designed as a peer-to-peer network, where nodes randomly connect to other nodes. Transactions and blocks are transmitted over this network by these nodes, until each node receives all the latest transactions and blocks. This works quite well, as the distributed model makes Bitcoin relatively censorship-resistant; there is no central point of control to shut down or pressure into compliance.
But there are other, more centralized alternatives for transmitting transaction data, too. The best known of these is “the” relay network, introduced in 2014 and maintained by Bitcoin Core developer Matt Corallo: “It's centralizing, but, hopefully, democratizing.”
Corallo's relay network serves two distinct purposes. First, it adds diversity to Bitcoin. Rather than just needing to rely on the peer-to-peer network, Bitcoin users can opt to receive transaction data and blocks through an alternative channel. This makes it harder to successfully attack the Bitcoin network; the relay network functions as a fallback. But the second, and more important reason, is a potential decrease of network latency.
Speaking to Bitcoin Magazine, Corallo explained:
The peer-to-peer code in Bitcoin Core is pretty gnarly. It's stable and it works, but it's not very efficient, and it's not very fast. The resulting network latency is a problem, especially for miners. It can sometimes take 10, 15 seconds before they receive newly mined blocks. If you're a miner, 10 seconds is like 1.5 percent loss in revenue. That is potentially a big deal. You don't want that.”
Some of the bigger miners (typically mining pools) have therefore come up with an alternative solution. Rather than using the peer-to-peer network to transmit new blocks, they have created an alternative – private – network. If one of these miners finds a new block, that miner immediately sends it over to the other miners on their private network, meaning all these miners can start mining on the new block immediately.
The problem, of course, is that this disadvantages all miners not using this private network. When a select group of miners starts mining on a new block faster than other miners this select group gets a head start every time one of them finds a block. This is especially worrisome because it is typically the bigger miners who have the time and resources to set up private networks. Smaller miners might, therefore, become less profitable and eventually drop off the network entirely, which centralizes mining even further.
A Leg Up
Corallo's relay network is essentially a hub-and-spoke network, which consists of servers set up in eight well-connected Internet traffic hubs: New York, Seattle, Amsterdam, Beijing, Tokyo, Singapore, Hong Kong and Novosibirsk (located in central Russia). Additionally, the relay network uses a fairly basic compression algorithm. Any Bitcoin node can connect to the nearest hub on Corallo's relay network, and send and receive transactions and blocks to and from other connected nodes.
But unlike Bitcoin's original peer-to-peer network, Corallo's relay network is centrally controlled: by Corallo. This means that users of the network need to rely on Corallo, most importantly for maintenance. (Though this doesn't stop the peer-to-peer network from propagating transactions and blocks in the mean time, of course.)
The relay network is not the most reliable thing,” Corallo acknowledged. “There is no service-level agreement ... once in a while servers go down and I don't fix it right away... sometimes I'm sleeping, or drunk.”
But absent better alternatives, the relay network can still save small miners on cost, meaning they can increase their profit, and remain competitive, Corallo hopes.
It's democratizing in the sense that larger miners do something like this already,” he said. “The relay network gives smaller miners a leg up, since they don't need to spend a proportionally large portion of their resources to establish these types of relay networks themselves. So it's centralizing in some ways, but, hopefully decentralizing, in others.”
The post How a Bitcoin Backbone Gives Small Miners a Leg Up: Matt Corrallo's Relay Network appeared first on Bitcoin Magazine.
In 2014, Indian prime minister Narendra Modi outlined a vision for a “Digital India,” a place in which all citizens in all parts of the country are connected, informed and part of a global economy.
Other hallmarks of this new India would be a transparent government with strong ties to its citizens where government services could be accessed from mobile devices.
EPaisa, a free point-of-sale app, has become India’s first mobile point-of-sale provider to integrate bitcoin as a payment option, becoming a part of this new, Digital India.
“To digitize India, you need to digitize the point of sale,” says ePaisa’s CEO and co-founder Siddharth Arora. EPaisa was founded in 2012.
“Bitcoin is currently becoming more and more popular in India because there is no need to provide any payment information,” says Arora. “However, the issue of accepting it has become a timely question for Indian merchants.”
The ePaisa app comes with a credit-card sized card reader to securely accept chip-and-PIN card payments and has now integrated Bitcoin, prepaid wallet and invoice payments for businesses. Merchants can request a bitcoin payment by letting their customers scan a QR code and receive the funds in their bank account the next day, free of charge. EPaisa works on any smartphone or tablet in India.
In 2013, ePaisa was awarded TechCrunch’s “Most Disruptive Company” and made it to the 2014 Global Red Herring Top 100 as well as Asia’s Top 100 awards.
The app works in 32 languages, it is free and works on all smartphones and tablets running on Android and iOS. They plan on introducing Apple Pay, Android Pay and other forms of payments for the Indian business owner.
With options like contactless payments, Apple Pay and bitcoin,” says Arora, “customers expect to pay however they want. Given this trend towards cashless shopping, not able to accept these modes of payments means lost sales for Indian merchants. We do not want that. We want to empower them to conduct any form of transaction and give the buyers a satisfying experience of making a purchase. With this new feature, we hope to offer our merchants more ways to accept payments and stand true to our commitment of enabling commerce.”
EPaisa expects that the user experience will be no different for the sellers. It works as follows:
At the point of sale, when the customer wants to pay for a product with bitcoin, the ePaisa merchant taps the bitcoin icon in the ePaisa POS application. As a result, a QR code pops up with the due amount, and the customer will scan that code using his or her bitcoin wallet app.
Prime Minister Modi’s vision for a seamless digital economy is materializing because of companies like ePaisa, which continues driving bitcoin adoption in the East.
“India has had huge success with prepaid wallets for online transactions,” Arora said. “We are enabling businesses to accept these wallets even for offline in store sales. Walk into an ePaisa-enabled store and you can make a payment with one of the top 10 wallets in India. We hope to power 25,000 businesses across all major metro cities in India by end of this year.”
The post ePaisa Brings Bitcoin Payments to Merchants Across India appeared first on Bitcoin Magazine.
Bitcoin is not anonymous, but, rather, pseudo-anonymous. By now, most Bitcoin veterans know this. It’s less obvious to many, however, why Bitcoin is not really anonymous by default, and what can be done to de-anonymize Bitcoin users – and what Bitcoin users can do to reclaim their privacy.
Below is an advanced beginners guide to get a better understanding of the nuances of Bitcoin and anonymity.
How do Bitcoin transactions work?
To better understand Bitcoin’s anonymity, it's necessary to first understand how Bitcoin works on a basic level.
Most importantly, the Bitcoin protocol effectively consist of a series of transactions. These transactions are basically a package of different kinds of data, among which are transaction inputs and transaction outputs. Inputs refer to Bitcoin addresses used to send bitcoin from, and can only be spent using the private key associated to that address. Outputs effectively refer to addresses used to send bitcoin to. Each Bitcoin transaction transfers bitcoin from one or several inputs to one or several outputs (therefore, transferring bitcoin from one or several addresses to one or several addresses).
It's possible for a transaction to simply have one input and one output. But that is rare, as it would require that the amount of bitcoin to be sent (the output) precisely equal the amount of an earlier amount received (the input).
Instead, it's quite common that a transaction consists of multiple smaller inputs in order to make for one larger transaction. If someone, for instance, controls three different inputs of one bitcoin each, and needs to send 2.5 bitcoin to an online store, the software will merge all three inputs into a single transaction.
And it's even more common that a transaction consists of multiple outputs. This is because Bitcoin uses change addresses. Change addresses allow users to create a transaction that returns the excess amount of bitcoin from one or several inputs back to the original sender. So in the example above, the software will typically create two outputs. One output attributes 2.5 bitcoin to the address belonging to the online store, while another output will attribute .5 bitcoin back to the newly generated (change) address controlled by the sender.
What makes bitcoin 'anonymous'?
There are generally three reasons why bitcoin is sometimes regarded as anonymous.
First, unlike bank accounts and most other payment systems, Bitcoin addresses are not tied to the identity of users on a protocol level. Anyone can create a new and completely random Bitcoin address (and the associated private key) at any time, without the need to submit any personal information to anyone.
Second, transactions are not tied to the identity of users either. As such, (and as long as a miner includes the transaction in a block) anyone can effectively transfer bitcoin from any address to which it controls the (private) keys, to any other address, with no need to reveal any personal information at all. Like physical cash, not even the receiver needs to know the identity of the sender.
And third, Bitcoin transaction data is transmitted and forwarded by nodes to a random set of nodes on the peer-to-peer network. While Bitcoin nodes do connect to each other using IP-addresses, it's not necessarily clear for nodes whether the transaction data they received was created by the node they connect to, or if that node merely forwarded that data.
How is anonymity defeated?
There are basically three ways to de-anonymize Bitcoin users.
First of all, even though Bitcoin transactions are randomly transmitted over the peer-to-peer network, this system is not airtight. If an attacker, for instance, has the means to connect multiple nodes to the Bitcoin network, the combined data collected from these different nodes might be enough to determine where a transaction originated.
Second, Bitcoin addresses can be linked to real identities if these real identities are used in combination with the Bitcoin addresses in some way. This includes addresses used to deposit or withdraw money to or from a (regulated) exchange or wallet service, publicly exposed donation addresses, or addresses simply used to send bitcoin to someone (including the online store) when using a real identity.
But perhaps most importantly, all transactions over the Bitcoin network are completely transparent and traceable by anyone. It's typically this complete transparency that allows multiple Bitcoin addresses to be clustered together, and be tied to the same user. Therefore, if just one of these clustered addresses is linked to a real-world identity through one or several of the other de-anonymizing methods, all clustered addresses can be.
What is clustering?
Let’s take a closer look at clustering.
A very basic clustering method is the analysis of transactions networks. In its most basic form, this refers to the several inputs combined into a single transaction. While these inputs could have originated from different addresses, the fact that they were combined into a single transaction suggests that all these inputs – and therefore all related addresses – are controlled by the same user.
Similarly, there are various methods to identify change addresses as being change addresses, which links them to the sender of the transaction. This is fairly straightforward when receiving bitcoin; the output that is not attributed to you is typically (though not always) attributed to the change address controlled by the sender. In addition, some Bitcoin software, reveals the change address to attentive onlookers, too. It does so, for instance, by always creating a change address as thelast output of a transaction. The use of multisig-addresses can be a giveaway as well.
Another clustering method is taint analysis. Taint analysis is fairly straightforward, too, and is even offered by several freely accessible block explorers. Basically, taint analysis calculates what percentage of bitcoin on a specific address originated from another specific address, whether the addresses are one transaction separated from each other – or more.
And then there's amount analysis and timing analysis. Amount analysis, as the name suggests, doesn't track specific transactions, but rather specific amounts. Similarly, timing analysis tracks specific times. If, for example, one input is exactly 2.6539924 bitcoin, and an unrelated output is exactly 2.6539924 (minus fee) one block later, it suggests that the sending and receiving addresses belong to someone using some kind of mixer (see below).
What can be done to reclaim privacy?
Bitcoin privacy is still very much an arms race. While progress is being made to improve Bitcoin anonymity on one hand, possible methods to de-anonymize users are often established on the other. And while it is beyond the scope of this article to explore all potential future possibilities to improve anonymity, there are some basic methods to increase privacy on the Bitcoin network available right now.
One such a straightforward solution is using TOR or other methods to hide IP addresses. If Bitcoin transactions are transmitted over TOR, there is no way to determine where they originated from (granted that TOR itself does as promised, of course).
Another basic solution to increase privacy is creating a new address for each transaction. Creating a new address for each transaction makes it harder to link addresses to real identities, as it would at the very least require more clustering to do so. An increasing number of Bitcoin wallets do this automatically using hierarchical deterministic (HD) wallet software.
A slightly more advanced method to gain privacy is the use of mixers. Mixers exist in multiple shapes and forms, but they basically enable that everyone using the mixer receives each others' bitcoin. If done well, mixing counters the analysis of transaction networks as well as taint analysis. And for improved results, mixing can be repeated.
One example of such a mixing strategy is CoinJoin, which merges inputs from and outputs to several users into one transaction – breaking the assumption that all inputs belong to the same user. CoinJoin does not, however, remove all taint from a Bitcoin address, since the inputs and outputs are still connected to some degree.
Alternatively, some mixers can remove all taint, as they return unrelated bitcoin from completely different addresses belonging to the mixer. However, these mixers are typically centralized, and as such will know the sending and receiving Bitcoin addresses belonging to users.
Additionally, to counter amount analysis, mixers can require all users to submit the same amount into the mix. Alternatively, mixing services can charge a random fee, making it harder for an outsider to link the amount of bitcoin sent to the amount returned. Furthermore, it's possible to break up the amount mixed, further obfuscating the coins, while smaller amounts are easier lost in “the crowd” of transactions.
To counter timing analysis, moreover, mixers can wait some random time before they send coins back; the longer this range, the harder it becomes to link transactions. Furthermore, extending the mixing time increases the likelihood of transactions to be obfuscated with normal transactions.
But in the end, Bitcoin privacy is still a sliding scale – not a binary problem. Rather than being either completely anonymous or not at all, Bitcoin users enjoy a certain level of privacy, depending on how much of their identity they reveal, which of the anonymizing techniques they apply, how many, and how often.
N.b.: For specific examples of mixing techniques, see the research paper cited below.
The article is largely based on 'Research on Anonymization and De-anonymization in the Bitcoin System', an ATR Defense Science & Technology Lab. paper by QingChun ShenTu and JianPing Yu from Bitbank Research Labs, published by Shenzhen University. Additional thanks go to Bitsquare developer Manfred Karrer and Blocktrail co-founder Jop Hartog for providing feedback on an earlier draft of this article.
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