decrypt.co For instance, if you look at EtherScan, you can find Vitalik Buterin’s wallet with his ENS domain vitalik.eth, and see his transactions over time, ERC-20 token transactions, ERC-721 token transactions and analytics of his wallet balance over time (shown below): Source: EtherScan This account probably does not represent Buterin’s entire ETH holdings.He is more aware of the privacy implications of account-based blockchains, the flaws of ENS and so on, but other users may not be as aware of these issues.From the research paper: “We observed that the publicly revealed ENS names already expose sensitive activities such as gambling and adult services.Therefore, users should avoid sensitive activities on addresses easily linkable to their public identities, such as ENS name or their Twitter handle.” As shown below, using ENS could link someone’s ETH transactions with a particular service: The researchers also looked at reducing the effectiveness of mixers such as Tornado Cash, which emerged as a response to the weak privacy guarantees of Ethereum transactions.Tornado Cash is a non-custodial mixing service, which uses mixer contracts to obfuscate the transaction history.
These mixer contracts hold an equal amount of funds from depositors, and it achieves anonymity through the use of zk-SNARKs .
There are mixer contracts for 0.1 ETH, 1 ETH, 10 ETH and so on.The data shows that activity is significantly lower for the 100 ETH mixer contract, thus it does not provide as much anonymity as mixers with lower values.Deposits for each mixer contract on Tornado.cash However, there are three techniques that can reduce the anonymity set according to the researchers: Linking withdrawals/deposits together if they are sent from/made to the same address, Withdrawals and deposits with unique and manually configured gas prices, then they are considered linked, and If there are transactions between Tornado Cash deposits and withdrawals, the addresses are linked.One interesting finding was that most deposit-withdrawal pairs that were linked left funds in the mixer for less than a day.User’s behaviour could be exploited by assuming majority of deposits are always withdrawn after 1–2 days.Most users wait less than one day to withdraw their deposits from Tornado.cash mixer contracts Specifically, the paper states: “…For the 0.1 ETH mixer the original average anonymity set size of 400 could be reduced to almost 12 by assuming that the deposit occurred within one day of the withdraw.” Of course, as more participants interact with Tornado Cash mixing contracts, it becomes harder to deanonymise users.
Because there are more active deposits, withdrawals become more difficult to link to past deposits.Even so, withdrawals that follow the deposit after a few days are still easier to deanonymise .The suggestions put forward to improve Tornado Cash include: Randomise mixing intervals, since mixing participants reduce their anonymity by withdrawing funds after short time intervals, Fresh withdrawal addresses for each withdrawal, which could be implemented on the user interface level.Currently, many users apply the same withdraw addresses across several withdraws, which decreases the complexity of linking deposits and withdraws.Use the Tornado Cash mixer after every transaction to ensure maximum privacy (however, this degrades the user experience) and so that their on-chain behaviours are unlinkable between uses of the mixer.The paper also looks at the Danaan-Gift attack.
The attack works as follows: a small donation (or tag) is made to an address with the tag potentially still visible after the value is shielded, transacted in secret and then de-shielded.The attack was first described in detail for zcash and you can read more about it here, but is also applicable to Ethereum (and some privacy-enhancing protocols built on top of Ethereum).The researchers see this sort of attack as a problem on the horizon, i.e., as there could be an application of the Danaan-Gift attack on privacy-enhancing overlays like the AZTEC protocol .These attacks may allow adversaries to link confidential transactions by fingerprinting users inside a confidential transaction overlay (shown in the diagram below).Whenever a user deposits a public amount to the confidential asset pool, an adversary could fingerpring the account.If the balance fingerprint survives, the adversay can observe when the user withdraws funds by inspecting the fingerpring on the withdrawn amount.
Assess how much an individual paid into a confidential asset pool.To conclude, the researchers offer more avenues for further investigation in the form of: Identifying more quasi-identifiers that may have potential to profile and deanonymise Ethereum users, Looking at Ethereum’s network-level privacy to examine the potential for full nodes and wallet software to deanonymise users, Examining the use of browsers such as MetaMask (and mobile wallets), how that affects privacy — even when combined with use of Tornado Cash, and Examining the privacy of UTXO cryptocurrencies: the use of quasi-identifiers (e.g.temporal activity, wallet fingerprints, and so on) to deanonymise users of UTXO-based cryptocurrencies is also possible, as well as potential to reduce the anonymity set of mixing services like Wasabi, with the paper finishing with the following quote: “We believe that in practice, due to the aforementioned quasi-identifiers, Bitcoin non-custodial mixers provide drastically less privacy and fungibility than what the community currently expects from those privacy-enhancing technologies.” 2.The Relationship Between Cryptocurrency Markets and Blockchain Transaction Activity Link to full paper here .Lennart Ante, an academic from the Blockchain Research Lab at the University of Hamburg, recently published a paper looking at blockchain transaction activity and the impact on cryptocurrency markets.The study looks at the data associated with 2,132 large transactions on the Bitcoin blockchain between September 2018 and November 2019, where 500 or more BTC were transferred.The underlying transparency of the Bitcoin network offers the possibility to track any transfers on the public blockchain infrastructure virtually in real-time.As a result, no network participant is able to move large values without the market recognizing this.
In fact, Whale Alert and similar Twitter accounts make this easy for traders by tweeting any large movement of BTC (or other major cryptocurrencies).However, different market participants will learn of a large transaction at different times.For example, the person who initiated the transaction has private information in advance.
Once they send the transaction, it is sent to a node in the Bitcoin network.The node checks the transfer (so someone else learns about it), and then forwards it to eight other nodes.Once these nodes check the transaction is valid, it is placed in the mempool, an area where miners can pick up pending transactions to include in their candidate blocks.Once the transaction is successfully mined, verifying the transfer, it is immutably placed into the blockchain.As a result of this process, nodes in the network learn private information about an upcoming transfer earlier than non-node market participants.
A large transfer, which is defined as 500 or more BTC being transacted, leads to a market reaction of abnormal trading activity.For most transfers, the underlying motives remain mostly unclear and the problem of information asymmetry is present, as only one actor (or a few) possess private information.
Consequently, uninformed market participants may not be willing to trade until the information asymmetry is resolved, which would result in a decrease in trading volume.If one or two addresses involved in a transfer are known, information asymmetry is decreased .
The data shows that trading volume increases even before transactions are confirmed by the network, explained by the fact that informed traders, i.e.traders that operate a Bitcoin node, change their trading behavior based on the information as soon as they learn about an upcoming transaction.Uninformed traders (market participants who do not operate nodes) cannot identify that informed traders have changed their behavior based on private information and therefore continue to trade at the same level.AAV: Aggregate Abnormal Trading Volume, CAV: Cumulative Abnormal Trading Volume.
The results above show that trading volume increases before, and with, large Bitcoin transfers.
This suggests that information about large BTC transfers is interpreted by the market before the transaction is verified.Therefore, informed traders in the form of involved entities in transactions, node operators or mining ventures try to exploit private information.To proxy for information asymmetry, the study uses publicly known bitcoin addresses of cryptocurrency exchanges in the transactions.Transactions in which neither the initiator nor the receiver are known bitcoin addresses show the largest largest negative effect on trading volume.On other other hand, transfers of bitcoin as relocation within a cryptocurrency exchange, i.e.where both initiator and receiver are public knowledge and the market can guess probable motives of a transfer, affect trading volume positively.“Non-exchange transfers have highest negative effects, followed by hot wallet transfers, and cold wallet withdrawals positively affect volume, while cold wallet deposits lack significance.” The market gauges the level of information asymmetry tied to the transfers and reacts accordingly.
Lower levels of abnormal trading are associated with higher levels of information asymmetry, since the probability that uninformed traders‘ will trade with informed traders increases — decreasing their willingness to participate in the market.The findings also show that periods with higher bitcoin prices result in larger market reactions.As anyone can deploy a node in the Bitcoin network, the paper recommends that traders should operate nodes themselves to close the information gap and to assess the probability of trading with informed counter-parties.3.Hayek and the Cryptocurrency Revolution Link to full paper here .In the Iberian Journal of the History of Economic Thought, David San Banz makes the case that bitcoin (and other cryptocurrencies) are not yet money in the framework of Austrian economist Friedrich A.Hayek, due to their limited use as a medium of exchange resulting from an algorithmic supply schedule that makes the stability of purchasing power difficult to attain.
Hayek’s most notable piece of work was the Denationalisation of Money (1970), which called for the introduction of private currencies that would compete with the monopoly of state-issued fiat currency and influenced the creation of Bitcoin.
The links between cryptocurrency and the Denationalistion of Money are clear: both reject the government monopoly over money and both center on the free market’s competitive forces (i.e., different cryptocurrencies compete with each other just as Hayek envisioned private currencies would).
Hayek proposes replacing confidence in a monopolistic issuer with the guarantee of a competitive process: in Bitcoin this is done through mining — energy expended to create blocks and earn fees from transaction (as well as the block subsidy).
He also contends that value of money is from their absolute scarcity — something that fits the bill with cryptocurrencies such as bitcoin (there will only ever be 21 million BTC in existence).In the Austrian school of economic thought , money is not just a particular thing.
Various objects lie on different parts of the spectrum of moneyness.The quote below elaborates on this point: “What we find is rather a continuum in which objects of various degrees of liquidity, or with values which can fluctuate independently of each other, shade into each other in the degree to which they function as money.” — Hayek on Money Different forms of money Using this framework, the author argues that Bitcoin and cryptocurrencies are progressing towards becoming money, although whether cryptoassets can become a generally used means of exchange is yet to be determined.The two major problems impeding cryptocurrencies are: i) the stability of purchasing power, and ii) even with a stable network of users, the algorithms behind bitcoin and altcoins means demand will never equate to supply — leaving us in a state of disequilibrium.In fact, the author argues that cryptocurrencies like Bitcoin are more closely connected to the Monetarist school of thought (e.g., Milton Friedman) which advocated a fixed, unchangeable rate of increase in the money supply.
In contrast to the goal of denationalising money, the role of cryptocurrencies could potentially be to protect personal wealth in countries with convulsive economic and social situations, e.g.Venezuela.Instead, the author argues that collateralised stablecoins like Tether USD are much closer to what Hayek thought would emerge in a competitive market of monetary issuance.Hayek argues that the key element for a currency to be accepted on a large scale by the market is the stability of its purchasing power.In fact, he predicts that currencies with the most stable purchasing power will be the winners.What are collateralised stablecoins? Collateralised stablecoins are those that are backed up by reserves, e.g.
USDT maintains a 1-to-1 peg with the US Dollar by backing up the Tether supply with an equivalent amount of US Dollars in the banking system.Stablecoins, by definition, should have stable purchasing power, but they require trust (unlike other cryptocurrencies).The key point is that the competitive forces of the free market keeps stablecoin providers in line and ensures that the trust is not broken.With the controversy surrounding Tether , other stablecoins (Gemini Dollar, USD coin, etc.) saw an opportunity to enter the market and built trust with consumers through extra guarantees (such as reserve audits, stronger legal guarantees and so on).Mismanagement of the collateral by the issuing company is the main risk related to stablecoins.Hayek considered that the quality of the collateral would be guaranteed by the existence of fierce competition between the issuing companies.
Collateralised stablecoins fit nicely into Hayek’s framework for competing private currencies.But non-collateralised stablecoins (such as DAI) attempt to do away with any central authority and come with the drawback of operational complexity.So it’s unlikely Hayek would have viewed these coins as private money, as illustrated by the quote below: “The dealings of an issue bank in other currencies would therefore never be a purely mechanical affair (buying and selling at constant prices) guided only by the observed changes in the purchasing power of the other currencies; nor could such a bank undertake to buy any other currency at a rate corresponding to its current buying power over the standard batch of commodities; but it would require a good deal of judgement effectively to defend the short-run stability of one’s own currency, and the business will have to be guided in some measure by prediction of the future development of the value of other currencies.” — Hayek on private money Following Hayek’s teachings, a stablecoin that want to achieve a stable value over time would have to use a basket of real goods (not end consumer goods but instead goods that have their prices negotiated internationally, e.g.commodities, standardised industrial products, etc.) as a reference, and not fiat currencies.Stablecoins in existence are pegged to fiat currencies.To maintain purchasing power, stablecoins could be pegged to a basket of real goods.However, for now, stablecoins are just a way of bridging the traditional financial system and are not intended to displace national currencies.
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