this post was submitted on 30 Oct 2024
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From what I understand, which honestly, isn’t a lot - the method used to anonymize transactions and balances is more like obfuscation than anything else. The system uses various techniques to fuzz up the data in such a way that it becomes impossible to trace.
It’s a bit like if you wanted to send a bank transfer for £200 but anonymize it somewhat, you could transfer that money around between a bunch of other bank accounts, before sending it on to the final source. And if multiple people are doing the same thing, it becomes essentially impossible to determine where the money entered and left.
The problem is though that such systems aren’t true encryption in the same way that RSA is, for example - the data isn’t unreadable, and it’s not impossible to reverse, it’s just that there’s so much junk data and it’s such a mess that it makes the true transactions difficult to identify and the end user has extremely strong plausible deniability. However, it’s likely just a matter of time before some state actor finds a vulnerability in the technique that allows them to trace transactions - if they haven’t already done so.
What if it bounced through multiple peers between sender and recipient, encrypted on each hop like Tor? Then they'd need to actually break the encryption, or compromise every hop.
The transaction data itself does need to be publicly readable, because otherwise the whole consensus mechanism that the blockchain relies on wouldn’t work.
Not every transaction, just the ones that open and close payment channels. This deletes data that would be needed to reconstruct an overwhelming majority of transactions.
(This is how Bitcoin's lightning network works.)
Hmm gotcha. Yeah this stuff goes over my head haha but it sounds similar to a Bitcoin mixer/tumbler. I wonder if the anonymity scales with the number of users using the network. I also wonder if you happened to send a transaction at a "bad" time (no-one else is using the network) then it's easier to trace.
Yeah, totally - I think it’s designed to be hard to understand, both tech stuff and financial stuff is often made intentionally confusing, in my opinion. It’s not dissimilar to the bitcoin mixers, but it’s still much stronger - the system is automated, you can’t mess it up as a user, you’re less reliant on a single-point-of-trust, and so on.
You might be on to something about quiet periods - I don’t really have the knowledge to say either way. There might be a bit of stuff that goes on in the background for wallets even if they’re not actively conducting “real” transactions. But, I don’t know, really.