Blockchain Privacy and Why You Should Care

Are you aware that your crypto and precious NFTs can make you a target IRL, Anon?

Pepe flexing his crypto has generated a lot of unneeded attention…

TW: this post contains pictures of graphical violence.

The goal of this post is to convey the message of why privacy is important and why we should care about this topic on a protocol such as Ethereum. We will then talk about why we need protocols on Ethereum allowing for private transfers where both sender and receiver addresses and/or amounts are hidden. This will be described over a series of posts. In this one, we will start off with a trivial example and abstract it away to a scenario that is much more dangerous and relates to our personal health and safety.

Imagine five years from now you are buying gifts for your family for Christmas using ETH on Amazon. The transaction is recorded on the network and anyone can look up the value of your transaction on Etherscan v3; seeing how much ETH you have spent on said gift. This becomes a habit of yours and you repeatedly do this every Christmas for a few years in a row. This has two problems.

First, your family may or may not come to know you are a cheapskate buying them the cheapest possible gifts off of Amazon. Second, by using ETH for buying items on Amazon, you have suddenly provided any data-hungry marketing company with invaluable information about you as a customer and consumer. What this creates is a situation where any company with a clear financial incentive to benefit from your purchasing habits (i.e. vast majority of companies within capitalism), can now do so. This involves understanding the times you like to purchase, the amounts, from which addresses you purchase, and to which addresses you may be sending these redeemable NFTs.

On some level, companies farming our information and using it for marketing purposes to benefit themselves does not feel far off from the world we live in today. The key difference is that they are regulated by consumer protection laws, and depending on which continent you live on, some supranational agencies actually are trying to limit the degree to which data farming on individual consumers is done and shared between companies. Furthermore, such information on Ethereum being available to any organization without border restrictions, circumventing both law and trade agreements, may open a type of Pandora’s box we are not fully grasping yet; see below.

Buying gifts for your family for Christmas is great. What is not great are sophisticated nefarious organizations that will probably emerge with the aim of tracking all wallets on the Ethereum network doing large transactions. The sole purpose of doing this will be to cross-reference the sums of those wallets with any other piece of information they may have about the person owning those wallets (such as IP, the geographical location where these wallets are tied to, etc.).

This is the dark side of self-custodial systems. Anyone who has non-negligible sums of ETH in their wallet and does not take security and privacy seriously is potentially painting a target on themselves. While this seems like a far-fetched scenario, stories like the one below may become more common in the future:

It is easier and cheaper to make a person with an 8 figure wallet disappear than it is to rob a jewelry store in the center of a city; though I am not an expert so criminal masterminds can correct me if I am wrong. While these so called “wrench attacks” are not completely new, as crypto assets become more mainstream it is likely we see more stories like this pop up on Twitter.

Privacy and OpSec is important and as your stack grows you should continue to re-evaluate your operational security and how safe your data is. In future posts I’ll explore privacy solutions on Ethereum as well as best practices overall. Hopefully this is enough to get you thinking anon!

Cypher is an art-loving academic with a deep appreciation for the works of the great masters, and a particular admiration for the work of Gary Gensler, the current chairman of the SEC. With a keen eye for detail and a sharp mind, Cypher seeks to unravel the mysteries of the art world and the financial markets alike, constantly pushing the boundaries of what we know and understand.