Transaction Monitoring Companies and the Battle for Privacy in Bitcoin
Chainalysis along with other notable players such as Elliptic, Confirm and Ciphertrace are transaction monitoring companies that provide data to governments and exchanges . Their services assist in criminal investigations, tax compliance and identifying funds associated with illicit activities.
Techniques Used for Identifying Bitcoin Addresses
Monitoring companies utilize various techniques in order to trace the flow of Bitcoin transactions. They make use of the data from exchanges and Internet Service Providers (ISPs) to link identities to Bitcoin addresses . Exchanges require customers to provide their identity to allow the connection between BTC addresses and individuals when required by law. Chainalysis also connects BTC addresses with IP addresses.
Understanding UTXO Transactions and Change Outputs
Bitcoin transactions operate on the concept of Unspent Transaction Outputs (UTXOs) which represent existing bitcoins. Each transaction involves the destruction and creation of UTXOs which connects addresses to specific amounts of Bitcoin . Wallets store private keys necessary to unlock UTXOs for transactions. Transactions typically involve multiple input UTXOs and output UTXOs including the change returned. Monitoring firms focus on identifying the change output UTXO as it reveals vital information for entity identification.
Challenges and Privacy Measures
Transaction monitoring companies encounter some difficulties in identifying UTXOs in an accurate way. Different address formats used by wallets and the emergence of new formats create complications in determining which UTXOs correspond to the transaction and the change returned. However these monitoring firms utilize heuristics and assumptions to overcome these challenges. They may also collect IP addresses through block explorers and manage nodes which emphasizes the importance of using Tor for enhanced privacy.
Maintaining privacy is central in Bitcoin transactions. Reusing addresses and conducting transactions with round amounts can compromise privacy by revealing transaction history . Blockchain explorers enable the tracing of transaction chains. However privacy can be preserved by utilizing techniques like Coinjoin where multiple individuals participate in a large transaction involving numerous UTXOs.