In the past decade, as Bitcoin has established itself as the most efficient financial system in the world, there has been a lot of false representations that have been propagated about it. One of the most common ones is that Bitcoin is anonymous. Well, it’s not and what some people falsely label as anonymity is in fact, privacy. In his most recent blog post, Dr. Craig Wright delved into the privacy model of Bitcoin, explaining why anonymity was never an option.
In Section 9 of the Bitcoin white paper, Dr. Wright, then going by Satoshi Nakamoto, defined the notion of a new privacy model that would be a great improvement on the traditional model. In the traditional banking model, transacting parties have to share personally identifiable information with third parties. However, with Bitcoin, the parties can keep the public keys anonymous outside of those who require knowledge of the transaction.
This has come to be falsely identified as anonymity, but it’s not. This is privacy. “It is keeping details away from the public; not those who were involved in the exchange and certainly not those who are required by law to monitor exchanges.”
The traditional banking model is notoriously closed off from the public, and rightly so. Revealing the details of a transaction would put the personal information of the transacting parties at risk. In an era where identity theft has become quite prevalent, the effects would be devastating. However, it also makes it impossible to view the transactional flows in any exchange, even when it’s of public interest. It leaves the public reliant on information released by the trusted intermediaries.
Bitcoin introduced a new privacy model in which transactions are no longer completely private. Dr. Wright explained:
In order to stop the main problem with digital currencies, double spending, it has been necessary to create a system that announces all transactions publicly and which can be viewed and analysed at will. Privacy can be maintained, but it is no longer associated with the transaction.
In this privacy model, identities are firewalled from the transactions and the public, but they are not removed.
While Bitcoin introduced the world to a decentralized financial system, many have perceived this to mean that perfect decentralization is possible, wrongly so. Perfect decentralization results in chaotic resource allocations. Ironically, a completely decentralized system results in an extremely centralized one as those who are most efficient at a point in time gather more resources and use them to take further resources from the competitors.
Dr. Wright further elaborated:
The model used to allocate identity and privacy within Bitcoin is one that maximises informational efficiency. Identity both has value and comes with its cost. Parties involved in transactional exchanges where identity is involved have to act to secure the information associated with the exchange. The cost, liability, and risk associated with its disclosure, theft, and fraud increase the cost to intermediaries, and lower the efficiency of trade and exchange.
Bitcoin’s privacy model doesn’t remove identity. Instead, it eliminates the need to use identity in a manner that lowers the security of the participants. This new privacy model allows participants to engage in a peer exchange whilst only having to store the minimal identity required to complete the transaction. Dr. Wright concludes:
Well-constructed systems for the private association of keys that are hierarchically determined from an identity key that is never used within the blockchain itself will allow individuals and corporations to interact using new key pairs for every transaction whilst simultaneously being able to provably exchange identity with other people in Bitcoin’s new privacy model.
New to Bitcoin? Check out CoinGeek’s Bitcoin for Beginners section, the ultimate resource guide to learn more about Bitcoin—as originally envisioned by Satoshi Nakamoto—and blockchain.