Why should i care about privacy?
Privacy is one of human rights. Privacy is necessary to issue fungibility in Bitcoin. Privacy is important for development of industries and business because enforces ideas and projects.
Bitcoin is not anonymous but are pseudonymous. Meaning that the blockchain is an open system, where any data is present and open, but transactions are not by default correlated to your identity.
….the traditional banking model achieves a level of privacy by limiting access to information to the parties involved and trusted third party. the necessity to announce all transactions publicly precludes this method, but privacy can still be maintained by breaking the flow of information in another place: by keeping the public keys anonymous….from bitcoin whitepaper
Privacy is a moving target and happens in multiple layers: when you purchase bitcoin, when you transfer coins and manage them with a wallet, in the lightning network, when you build your transactions, when you connect to the Internet, etc. This means that privacy is achieved thinking to many aspects and each of them can change from day to day because laws, technologies and practices change too.
Privacy is stronger when many people together are caring about it. Infact you can achieve privacy only if other people is willing the same. There is no privacy just alone.
What’s a UTXO?
In bitcoin transactions have inputs and outputs. An unspent output is called UTXO, and it is called “coin”. A previous output can be used as input for a new transaction you are going to sign next. UTXO is the result of a transaction. A transaction, infact, puts a spendable amount into an address from which it can be controlled. In short, an UTXO is a spendable amount that an address controls.
Privacy: common errors
The most of today’s transactions are done with a lot of errors and with no care of privacy and security. People should care privacy and must be educated in doing that. Here a non exhaustive list of common errors that the most of people do and it is important to start avoiding them as soon as possible.
- Reuse of an already used Bitcoin address;
- Use of a custodian wallet; In this case the privacy is totally zero because the company owning the wallet knows all about you (your IP, your btc addresses and amounts and many times your identity);
- Hold bitcoin into an exchanger for same reasons as the above point;
- Use of wallets with poor privacy practices. For example a wallet which puts the change address always as last output, or a wallet which builds transactions in such a way that is easy to understand which wallet created the transaction itself, etc;
- Sending Bitcoin directly to your coldwallet from the exchanger without mixing the coins before. In this way the exchanger knows you address and can correlate it to your identity;
- Publish your addresses on the Web with your name;
- Declare your holdings on forum or chats;
- Use of a blockchain explorer. The blockchain explorers can correlate your IP connection to the address or transactions you are monitoring. For example many refreshes on the same transaction page may show that you are correlated with that particular transaction and probably the owner of one or more of involved addresses;
Note for advanced users: if you purchase an item online (which has to be sent to your postal address) and paying with bitcoin (with a change transaction), the seller knows your change address as belonging to you; To mitigate this problem you should use a transaction without a change or the lightning network (please see below). If there is no way and you have to pay normally, be sure to tag the exchange coin as deanonymized one, so to be used in the next coinjoin session you will do.
If you use a wallet along with your internet home or work connection without any protection, your connection data could be analyzed for example by ISP provider or wifi or 4G provider and so on. In this way the fact that you are transacting and managing bitcoin can come easy to discover.
Privacy: some tip
- Avoid address reuse. Using same address more than once is dangerous for privacy because it shows that more transactions have been executed by the same entity and therefore are correlated.
- Coin control. Modern wallets have the possibility to choose which coin to spend. You should always label all your coins carefully setting there dates and informations regarding the source (privacy or not). Those labels are private and written locally on the host computer. This helps to decide which coins to spend and when. For example, spending a non private coin (for example received from a client) makes possible for the sender of that coin to know where you spent it, because he knows that address as belonging to you.
- Change avoidance. Sending a transaction without a change is very useful for privacy because makes difficult for automated heuristic programs to correlate between addresses. This also implies lower fees. If this situation is not feasible for your transaction, then you can use a multiple addresses for change. This breaks the heuristic assumption of a change address. This method comes with higher fees.
- Coinjoin. This is a privacy technique. In this way many people collaborate to create a single transaction with all their inputs. This is very good for privacy because heuristic analysis programs assume that all the inputs belong to the same owner. It’s very important, after coinjoin, not to use several utxo for a next transaction (meaning that you dont have to merge two different utxo resulting from the coinjoin), otherwise it’s like you declare that both of them belong to you. The fact that the mixed utxo comes from a coinjoin should be duly noted into coin labels.
- Lightning network. Use LN as more as possible, because this is very good for your privacy;
- Dont use blockchain explorers (if you use them, protect your connection with TOR). Otherwise much better using your bitcoin full node or your wallet software to check your transactions;
- Encrypt the storage disk part in which you are saving your wallet informations (you can use an encrypted filesystem), because otherwise access to that files can show informations and weak your privacy;
- Use a bitcoin full node. In this way no one can has the informations about which transactions or addresses the user is interested in; the node brings many other advantages also in terms of security;
- When managing Bitcoin always use tor to connect to the Internet. In this way your ISP, wifi, 4G providers cannot know about that.
…businesses that receive frequent payments will probably still want to run their own nodes for more independent security and quicker verification…from the bitcoin whitepaper
please see this post about the advantages of a bitcoin full node.
How the change avoidance works?
You can think that spending without change is difficult, but maybe it is not clear how to move. For example: you have 1 btc coin and you have to pay 0,3 to a counterparty, you first make transactions to yourself of 0,3 and 0,7 in order to break the previous existing coin and then you can spend the remaining 0,3 coin without change directly to your counterparty. This is obviously not very comfortable but it is more privacy-protected if you care about the payee not knowing about your addresses and holdings.