Blockchain privacy has always been built on the foundation of pseudonymity. Since the launch of Bitcoin in 2008, users have relied on pseudonymous addresses to transact without revealing their true identities. For the most part, this system has worked well. While anyone can view a person’s blockchain transaction history, the identity behind the transactions has remained protected, providing a level of privacy.
However, as blockchain technology evolves, some experts argue that pseudonymity is no longer sufficient to protect privacy in today’s digital world. With the rise of artificial intelligence (AI), blockchain analytics tools, and increasingly sophisticated data-gathering methods, there’s growing concern that privacy on the blockchain may be at risk.
So, let’s break down why pseudonymity might not be enough and what’s needed to take blockchain privacy to the next level.
Pseudonymity in Blockchain: The Current State of Privacy
Pseudonymity has been one of the core tenets of blockchain technology, offering a certain level of anonymity to users. Essentially, a blockchain address acts as a pseudonym, and while transactions are visible to everyone on the blockchain, they don’t inherently link to any identifiable person or entity.
For years, this has worked as a sufficient barrier against privacy breaches. You could send funds, buy assets, or even trade tokens, without revealing your identity. In theory, this has kept users’ activities secure and private.
But here’s the problem: centralized exchanges (CEX) and Know Your Customer (KYC) regulations have changed the landscape.
The Growing Risk of Exposure
As blockchain technology has evolved, so too has the sophistication of data-gathering tools. Today, it’s easier than ever for blockchain analytics platforms to link transactions back to a real-world identity. Chain analysis tools like Chainalysis and Crystal can trace transactions, map blockchain activity, and connect addresses to real identities, especially if that user has interacted with a centralized exchange that requires identification.
One hack away from exposure
Leona Hioki, system architect for privacy-focused Layer 2 blockchain INTMAX, highlights a critical risk: if a hacker compromises a centralized exchange, the user’s true identity can easily be exposed. Many exchanges collect personal data as part of their KYC processes. If an exchange gets hacked, these personal details are at risk of being exposed, making previously pseudonymous users identifiable.
Take the hack of Liquid, a Japanese exchange that was breached in 2021. After being acquired by FTX and later rebranded as FTX Japan, nearly all of their user data was leaked. This exposed sensitive information, linking wallet addresses to real identities. Hioki points out that this is one of the dangers of relying on centralized systems to store personal data.
Even when users take extra precautions by using different wallets for different transactions, the use of blockchain analytics can still unmask them.
The Need for Blockchain Privacy: A Shift in Perspective
As AI models continue to advance, personal data is becoming more valuable—and more vulnerable. Today’s world is driven by data, especially in sectors like finance, healthcare, and advertising. Every online action, from a simple search to a purchase, contributes to a growing digital profile that can be used to personalise experiences or even sold to third parties.
This need for continuous data collection and usage has placed privacy in the spotlight. As data sovereignty becomes a bigger concern, many believe it’s time for a fundamental shift in how blockchain handles privacy.
The Role of Zero-Knowledge Proofs (ZKPs) and Privacy Enhancements
One of the most promising solutions to blockchain’s privacy problem lies in zero-knowledge proofs (ZKPs). ZKPs allow transactions to be verified without revealing any underlying data. This ensures that the validity of a transaction can be confirmed without exposing sensitive information about the parties involved.
The INTMAX blockchain uses ZKPs to enhance privacy by enabling validators to confirm transactions while ensuring that the underlying data remains confidential. By using this technology, INTMAX seeks to protect users from privacy violations, even in the face of sophisticated blockchain analysis tools.
The AI-Driven Data Problem
As artificial intelligence (AI) continues to make strides, personal data is becoming an even bigger commodity. AI models need access to vast amounts of data to learn and make decisions. This creates an increasing need for systems that can protect privacy while still allowing AI to function effectively.
Alex Page, founder of Nillion, a blockchain project focused on privacy, believes that pseudonymity is no longer enough in a world where data is continuously created and fed into AI models. He argues that the traditional model of pseudonymous blockchain addresses works when users interact sporadically, but it breaks down when you consider modern, data-heavy applications.
In his view, multi-party computation (MPC) could be a solution. MPC enables users to collaborate on data analysis without ever sharing their individual data with centralized systems or platforms. This creates a new paradigm in privacy, one that does not rely on a single, central entity to protect user information. Nillion has already deployed this technology in its messaging platform, where users can communicate privately without the need for central servers like Signal or Telegram.
Privacy in Blockchain: A Double-Edged Sword
There’s an inherent tension when it comes to privacy in blockchain. Some argue that enhanced privacy features could enable bad actors to operate with impunity, making it harder to track criminals, fraudsters, or hackers. If blockchain systems are too private, it could potentially give these bad actors the freedom to launder money or engage in illicit activities without oversight.
However, as Leona Hioki points out, the introduction of privacy features like ZKPs does not mean bad actors go unchecked. INTMAX uses decentralized chain analysis to provide risk scoring for transactions. This means that, even with enhanced privacy, the system can identify high-risk deposits and block them accordingly. This ensures that bad actors are not able to exploit privacy features to launder money or evade justice.
Page echoes this sentiment, noting that while bad actors will always find ways to exploit technology, adding privacy to blockchain will not make it easier for them to do so. Rather, it will open up new opportunities for developers to build with greater freedom, without compromising security or privacy.
Conclusion: Rethinking Blockchain Privacy
Blockchain’s pseudonymous nature has worked for years, but the rapid advancement of AI and blockchain analytics is forcing a reassessment of how privacy is handled on the blockchain. Pseudonymity alone is no longer sufficient. To protect users and ensure data sovereignty, new technologies like zero-knowledge proofs and multi-party computation are essential.
As blockchain continues to grow, its ability to safeguard privacy will be a crucial factor in ensuring it remains a trusted platform for users around the world.
