Is Bitcoin Really Decentralized and Anonymous?

With distrust growing in the more traditional centralized global financial system due to innumerable security threats, most young entrepreneurs have decided to place their trust and money in decentralized currencies, such as Bitcoin, which they think also provides anonymity in its transactions.

Is Bitcoin really decentralized?

After reading through tons of articles of Bitcoin for beginners, numerous qualities of cryptocurrency are always reiterated. Bitcoin being decentralized is one of these qualities. So, what does it actually mean?

Essentially, the Bitcoin protocol technology operates like a country without a President, where the laws governing the transactions people make are intrinsically and automatically imposed on the citizens by rules enforcers. These collective rules are called “Protocol” in the Bitcoin network. And because there is no one ruler, no one has the authority to change the Protocol rules.

It can be said that Bitcoin pioneered the use of a distributed system in computer science circles, which is deemed as the answer to The Byzantine Generals Problem first proposed at NASA. The conundrum involves defining how to manage a network of disconnected entities in a structure without a ruler or leader. This was made possible by incorporating into the system a Proof of Work, which ensures the validity of a transaction. The Bitcoin Protocol and Proof of Work allow for the disconnected units known as miners or honest nodes to follow a common direction without the need for centralized command. In this way, Bitcoin is truly decentralized.

Is Bitcoin truly anonymous?

Now, another term that frequently pops out when reading about Bitcoin for beginners is “anonymous.” Because of Bitcoin’s supposed anonymity, it even gained a reputation during its first years for being a place where criminals and terrorists can safely hide their illegal activities. However, this is a huge misconception.

A brief Bitcoin background needs to be explained in order to fully understand whether or not it is anonymous. In 2017, due to a scalability dilemma, Bitcoin Cash (BCH) was created. BCH wanted to retain creator Satoshi Nakamoto’s original plan for Bitcoin to be more scalable.

In 2018, the BCH faction, again, came to a disagreement. One side wanted to implement technical changes that would diverge from the original Bitcoin Protocol to create a more anonymous system that makes transactions impossible to be traced by authorities, while the other wanted to follow Satoshi Nakamoto’s White Paper to the letter. Bitcoin Satoshi’s Vision (BSV) was then created to keep its original design and not make the changes that would make Bitcoin transactions anonymous and untraceable.

In reality, Bitcoin pseudonymous which gets confused with it being anonymous. Bitcoin public addresses cannot directly be tied to a real-life identity when seen on the blockchain ledger. However, through KYC/AML (Know Your Customer/Anti-Money Laundering) policies, Bitcoin addresses can still be traced to a person. Once these policies are enforced, a user’s pseudonymity is no more. At least to regulators and law enforcement. The general public will still never have access to that information unless the owner of the Bitcoin address discloses it publicly.

Furthermore, because Bitcoin uses Blockchain technology, which is an immutable ledger of transactions, wherein data is repeatedly copied, stored and broadcasted to all honest nodes within the network, it has actually become a treasure trove of information for authorities. As Nakamoto once said, “Bitcoin needs to work within the law to be valid.” 

So, is Bitcoin really decentralized? Yes, it lacks a central authority that governs its rules which were set in stone back in 2009 by Satoshi when he created it. Is it really anonymous? No, its private. And this crucial information should be included in all Bitcoin for beginner guides.