Why Pseudonymity in Blockchain Might Not Be Enough

by Giorgi Kostiuk

a year ago

Since the inception of cryptocurrencies, pseudonymity of addresses was seen as a reliable way to protect user privacy. However, the rise of AI and security threats question its effectiveness.

Challenges in Maintaining Privacy

Leona Hioki, a system architect at INTMAX, states that pseudonymity no longer provides sufficient protection for users. Centralized exchanges demand user data for compliance with 'Know Your Customer' rules, creating a risk of identity exposure in case of a hack. Analytical tools like Chainalysis and Crystal make maintaining anonymity more challenging. 'Centralized databases have no incentive to protect information,' Hioki notes.

So many databases are centralized, there’s no incentive to protect that. For example, there was a huge privacy leak on a Japanese exchange, FTX Japan. Its name was ‘Liquid,’ but was renamed to FTX Japan. And now nearly all their records are hacked and leaked. And why did that happen? Because there’s no incentive to protect people’s information from a CEX.Leona Hioki

Privacy Risks in the AI Era

AI blockchain founder Alex Page claims pseudonymity has become obsolete as AI models demand constant user data access, compromising user privacy. Page suggests multi-party computation (MPC) technology to limit data access, allowing collaboration without large corporations.

I think pseudonymity works in a world where you can create an unlimited number of wallets, or you can have an unlimited number of, say, small identities that exist in different connection points. Where it falls apart is when we’re talking about actual use cases where you’re consistently contributing data to an application [...] we need systems to solve for that part.Alex Page

Countering Bad Actors

Concerns exist that blockchain privacy might allow offenders to evade justice. However, Hioki assures that the worst violators can still be barred from networks. INTMAX uses decentralized chain analyzers for risk assessment, blocking major hacker deposits. Page asserts that adding privacy won’t facilitate malicious actions.

Pseudonymity as a user privacy protection method in blockchain has lost its effectiveness. Advanced and robust methods like multi-party computation and zero-knowledge proofs are necessary to ensure privacy.

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