From cointelegraph by Christopher Roark

Since the beginning of crypto, users have relied on the pseudonymity of crypto addresses to protect their privacy, and for the most part, this system has worked.

Anyone on the Internet can view a person’s blockchain transaction history, as all of their transactions are transparent. However, in most cases, the person’s true identity remains a mystery, providing some level of privacy.

For 26 years, since Bitcoin was invented in 2008, this system has protected users’ privacy to some extent.

But some Web3 protocols claim the time has come to rethink the idea that pseudonymity is enough.

For these protocols, the rise of artificial intelligence models and the need for constant data to feed them has made privacy and data sovereignty more important than ever.

One hack away from being exposed

Leona Hioki, system architect for privacy-focused layer 2 INTMAX, told Cointelegraph that pseudonymity just doesn’t provide enough protection for users.

He said that nearly all centralized exchanges have imposed Know Your Customer and Anti-Money Laundering provisions, requiring users to submit photo IDs before using the exchange.

This means that the user’s deposit address can be known if just a single hacker manages to breach the exchange’s defenses. And once the deposit address is matched up with a real identity, the person’s entire on-chain history can be revealed.

“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.”

Japanese exchange Liquid was hacked in 2021. It was later purchased by FTX and renamed “FTX Japan.” It then went bankrupt in November 2022 as part of the overall collapse of FTX.

According to Hioki, the problem isn’t just that this centralized data sometimes gets stolen.

The bigger issue is that blockchain analytics programs have gotten so sophisticated, it's become nearly impossible to avoid getting doxxed.

“There are chain analyzers like Chainanalysis and Crystal, and these high spec tracers which can [reveal] almost all of the addresses which are binded to CEX,” Hioki stated. “Criminals can use these, anybody will have access to use that. It’s quite dangerous and actually not anonymous at all.”