Anonymous vs Untraceable
All too often, people trying to understand blockchain technology misuse the concepts of “anonymous” and “untraceable.” During Bitcoin’s initial main rise of 2011-2015, many people getting familiar with the technology were proudly declaring Bitcoin as being “untraceable,” when what they really meant was “anonymous.”
The stark truth is public blockchains like Bitcoin are arguably the most traceable ledgers in existence today. The ledger is so traceable that anyone in the world can go to a number of websites known as “blockchain explorers” and see where the coins come from, where the coins are going, and how many coins are controlled by each public address. However, the public addresses are random and give no personally identifiable information, so no one immediately knows who controls each address. In that respect, anonymity is provided by the blockchain network.
There are two supplementary concepts that apply here. The first is that governments and entities with access to large amounts of internet traffic data can use advanced algorithms to “paint a picture” as to who controls a particular address on a blockchain like Bitcoin. The company Chainalysis is a good example of this. Chainalysis analyzes blockchain activity and combines it with other data to build a case for a particular person possibly controlling a particular public key. This information is used to combat crimes like money laundering and to prevent the financing of terrorist activity. It is far from impossible to use a person’s Internet footprint to establish a link to their activity on a public blockchain.
The second supplementary concept is that other blockchains do exist (Bitcoin is not one of them) that are in fact untraceable. The protocols behind these “privacy coins” are designed in such a way that if you tried to look at that blockchain, you would have no idea where coins come from, where coins are going, which address controls each coin, and in some cases what the addresses are in the first place. The privacy-based blockchains make it much harder to determine what activity is occurring on the chain.