Blockchain Privacy: Why Some Believe Pseudonymity Alone is insufficient

Are you concerned about your privacy when it comes to blockchain transactions? Since the early days of crypto, users have relied on the pseudonymity of their crypto addresses to keep their information private. This has generally been effective, as all transactions are visible on the blockchain, but the true identity of the person behind the transactions remains hidden. However, experts now warn that a single hack could reveal a person’s identity in an instant, and advancements in personalized AI technology are making it increasingly difficult to maintain privacy.

For over 26 years, Bitcoin has offered a level of privacy protection to its users. Yet, some Web3 protocols are urging a reevaluation of whether pseudonymity alone is enough to safeguard privacy. With the growing sophistication of AI models and the constant need for data to fuel them, some argue that privacy and data sovereignty are more vital than ever before.

Leona Hioki, a system architect for privacy-focused layer 2 INTMAX, highlights that relying solely on pseudonymity may not provide sufficient protection. With centralized exchanges requiring users to submit photo IDs for Know Your Customer and Anti-Money Laundering purposes, a breach in their security could expose a user’s deposit address, leading to the revelation of their entire on-chain history. This vulnerability was exhibited in the case of the Japanese exchange Liquid, now FTX Japan, which suffered a privacy leak due to inadequate protection of user information.

To combat such privacy breaches, INTMAX employs zero-knowledge proofs to allow validators to verify transactions without accessing the data. Meanwhile, Alex Page, founder of AI blockchain Nillion, underscores the evolving landscape where pseudonymity may no longer suffice, especially in scenarios where users consistently provide data for personalized applications. The use of multi-party computation (MPC) technology, as implemented by Nillion, aims to limit data access, enhancing privacy in collaborative settings without relying on centralized systems.

Despite concerns of blockchain privacy potentially aiding malicious actors, Hioki reassures that networks like INTMAX use decentralized chain analyzers for risk assessment, deterring major hackers from operating within the system. Page emphasizes that bolstering privacy on the blockchain does not facilitate criminal activities, but rather expands possibilities for innovative development opportunities.

In conclusion, as the digital landscape evolves, the importance of privacy on the blockchain grows. Reassessing the efficacy of pseudonymity in protecting user information and adopting advanced privacy technologies are crucial steps toward ensuring data security in an increasingly interconnected world.