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But he encountered the wrong Austin: Drug Enforcement Agent Austin Love. The DEA promptly arrested Vallerius and charged him with conspiracy to distribute controlled substances, including cocaine, fentanyl, methamphetamine, LSD, and oxycodone. If convicted, he faces up to life in prison. In one key step, they noticed that an administrator of the site named OxyMonster was collecting Bitcoin donations through an online tip jar and that 15 of the 17 transactions moving Bitcoin out of the tip jar went to accounts belonging to a user named Vallerius on the site LocalBitcoins.
The agents searched for the uncommon name online and found several threads that seemed to connect the OxyMonster account to French national Gal Vallerius. Today, many people see cryptocurrencies as anonymous, untraceable digital money—and indeed, some of the first uses were to launder money and buy illegal drugs.
Rather than shield our identities, cryptocurrencies can function as sponges for information and could, perversely, further endanger our online privacy. We already see some of the creepy potential of online tracking, like when we are presented with ads on a website that clearly relate to Google searches we did previously. Digital currencies could dramatically raise the stakes. If we start broadly using them and our purchase histories leak through accidents or hacks, much of our private lives could be exposed: Even many digital-money proponents say the lack of privacy is a major problem.
That would be crazy. Yet some hopeful programmers are working on various tools to turn cryptocurrencies into safeguards of our information.
With virtual money edging ever closer to mainstream adoption, the design choices made now may determine whether it ends up being mostly a means for illicit activities, a tool for free interaction, or simply a more efficient way for us to be watched. At their heart, cryptocurrencies are digital stores of value that are exist entirely as code. The great challenge to using a decentralized system like this is ensuring that each bit of digital money exists in one place at a time—like hard cash rather than easily duplicated software—and that all the nodes agree on who owns what.
A solution to this problem was revealed in , when the mysterious author or authors known as Satoshi Nakamoto published a technical paper outlining the design for Bitcoin. The paper included an ingenious plan for how nodes could come to a consensus about ownership of virtual currency: Each block also connects in a specific way to earlier ones, forming a chain of blocks. Once a miner hits on the solution, it transmits it out to the network and all the nodes add it to their copies of the ledger.
The miner is rewarded with Bitcoins. Each new block confirms the transactions in the existing chain, preventing the chain from being altered or hacked. A central feature of the peer-to-peer blockchain, and a key distinction from traditional centralized money, is that everyone can see every transaction.
At first glance, it seems like this achieves what Nakamoto was trying to accomplish: But as more data piled up on the Bitcoin blockchain, it became clear that even if a single transaction is anonymous, multiple transactions might not be. By connecting scraps of information from many transactions on a public blockchain, observers can find out a surprising amount about what they represent.
The activities revealed public Bitcoin addresses for the counterparties, which included many hubs of the Bitcoin economy, such as major exchanges. The researchers could then follow and study the flow of Bitcoins through the network.
They could, for instance, easily trace some of the many Bitcoins that have been stolen from individuals and exchanges. Often they could tell when coins were changing ownership or merely moving between different accounts belonging to the same user, though some of the stolen coins took complicated paths that made it difficult to follow. With all of this data visible to anyone looking, a number of companies have sprung up offering sophisticated ways of analyzing blockchain data.
And agencies like the FBI now routinely analyze information gleaned from blockchains to investigate ransom demands from hackers and other suspects—including alleged dark web drug kingpins headed to beard competitions. There are also big risks to the privacy of regular, non-criminal users of cryptocurrencies, according to a study published by researchers at Princeton last summer. These bits of code track people online to make websites more convenient to use and to target advertising around the web.
For people paying in virtual money, their crypto histories, including past purchases, could then be available to the many companies using trackers—and to any hacker who gains access to that data or who sneaks a malicious tracker onto a shopping site. The simplest solution is simply to remove blockchains from public view. Some financial firms have done this by segregating projects from established blockchains like Bitcoin and Ethereum, the network that hosts the second-biggest cryptocurrency.
The firms themselves run these walled gardens and give certain people permission to access them. This provides privacy and much greater efficiency but is fundamentally unsuitable for a cryptocurrency open for anyone to use. This obscures where each bit of digital money goes and who owns it. Though mixing makes coins harder to trace, it leaves some questions about whether there are enough mixing partners, whether deposits to and withdrawals from the pool are truly obscured, whether putting your money into a tumbler connects it with money being laundered, or even whether tumbling is itself an indication of money laundering.
Some developers are taking the more extreme step of creating entirely new, privacy-oriented currencies. More recently, there has emerged a new currency that boasts a more sophisticated privacy safeguard.
That itself is an easy task; computer scientists have many clever ways of keeping information private, such as the public key encryption employed in secure web-browsing and email systems. The trick, then, is verifying the data: Then a miner can look at the transaction, validate its proof, and record it in the blockchain for the world to see.
Everyone can trust that the transaction is above board, even though no one knows the specifics of what happened. The math is incredibly complex—well beyond the scope of this article. If you want more information, the Zcash site has a more in-depth overview and the Ethereum blog dives into the details. Before integrating zk-SNARKS into the Zcash protocol, developers had to generate numbers called parameters that computers in the network would use to create and validate the proofs.
But the process of creating parameters for public use also births an evil twin: To further decrease the possibility of spying, the participants wrote their own software, bought all new computers from random stores, set up their computing stations in obscure motel rooms, physically removed all the communication hardware from the airgapped computers, and recorded every step of the process on video.
One participant ran his calculations in a car driving across British Columbia, on a laptop held in a cardboard box lined with aluminum foil. After the ceremony, they erased all traces of the data through high-tech means like destroying the computer components with a grinder or blowtorch.
Monero is a freewheeling affair run by a community of unpaid enthusiasts with a libertarian-anarchist vibe. Like Bitcoin, a significant amount of the early interest came from drug dealers and other users of the dark web looking to hide from the law.
Zcash, in contrast, was launched by a company, with significant outside investment. The two currencies have developed a rivalry, with each side trumpeting its own strengths and sniping criticisms at the other. In truth, each of these leading privacy-oriented currencies has its own strengths and weaknesses. The issues were mainly present in the currency before RingCT was released last year but persisted in milder forms even after that. There were ways that careful users could avoid revealing their information, but people in general are notoriously bad at taking active steps to preserve their privacy.
Peter Todd, the ceremony participant who did his calculations from the mobile compute station driving across Canada, says the security measures were not as ironclad as they appeared. Moreover, he says that even if the ceremony was safe, the high-powered math behind Zcash might not be.
Many of the developers working on the two currencies acknowledge these shortcomings and are working hard on fixes. Monero, for example, plans to continue to refine its dummy transactions so as to better hide the real ones. Zcash is planning a major upgrade to its code that will include a second ceremony, in which hundreds or even thousands of people will participate. But money, brainpower, and optimism are all in abundant supply. These are hopeful days for cryptocurrencies. Bitcoin and other cryoptocurrencies—the future of money or hype?
Here's what they are. Though individual Bitcoin transactions can be anonymous, information about users can leak out of the system through other ways.