No Wallets and No Internet: the Fully Anonymous Cash of Tomorrow


Why cash is better than debt wealth? Сash is the actual money, i.e. common liquid commodity, not a promise to provide such commodity. Cashless money is promissory notes cleared by cash.

Cash transactions are untraceable, they’re anonymous and decentralized. They require no third party involvement, and, as opposed to bank accounts, are not subject to suspending. They require no additional machinery because they’re effected by passing a thing used as cash. One may freely move such things without anybody else’s knowledge even across national borders.

So, we all agree that cash is good. The only thing left to answer is whether a central bank’s note is cash?

Affirmative answer to the question seems obvious. This is what allows one to run decentralized transactions with zero involvement from additional devices. One can’t trace transactions in this case, unless the money was somehow marked. One may settle cashless money, like that on a bank account, with this thing. Still, the fact that modern-day national currencies are obligations, which, to some extent, are a fake wealth, seems quite as obvious. So, what’s that all about?

The answer is quite simple: modern-day fiat currencies are both cash and debt.

Cash Is Not What It Used to Be

When money parted with gold back in 1971, the debt-based nature of bank notes has not gone anywhere, and their issuance is still a central bank’s liability. However, they’re officially cash now: prices for goods are expressed in them, not in gold, they function as a means of exchange, saving, payment, and global money.

In terms of the theory of money, cashless economy isn’t economy without cash. It’s an economy where bank account records function as cash, therefore such accounts cease to be bank liabilities cleared with cash, and turn into cash, while paper money fade into oblivion.

Parting with gold resulted in a fundamental content change of cash: while it had been something whose value was independent on the will of monetary authorities, it became something fully dependent on it. Switching to cashless economy brings about yet another fundamental metamorphosis of financial relationship. It urges people to seek an alternative solution.

Is Bitcoin Future Cash?

Bitcoin, according to its own whitepaper, is a p2p system of electronic cash. Similar to cash in cashless economy, this fiat 2.0 exists only as a record in an electronic database, and nobody undertakes to clear it with anything. The difference is that cashless economy is but a theory still, while bitcoin ceased to be a mere whitepaper eight years ago.

The main economic difference between bitcoin and modern-day national currencies lies beyond bitcoin’s digital nature. Decentralization, lack of status as a legal tender, blockchain, and issuance algorithm have nothing to do with it either. A decentralized private blockchain-based fiat with limited supply is still a fiat.

The biggest difference between bitcoin and national currencies is that it has functionality that goes beyond money. Bitcoin isn’t a useless paper or a record on a hard drive that can’t be nothing else but a legal tender. It’s a commodity whose usefulness lies in the fact that it can be used as a carrier of any security or access token for any data in the world’s most secure blockchain. National currencies in cashless economy, however, might have the same functionality, yet for now we’ve got what we’ve got.

Still, bitcoin isn’t perfect. Transactions in bitcoin may be decentralized, yet, as opposed to paper money, they require additional devices. Similar to a bank account, a bitcoin address might be suspended if miners agree to ignore transactions from said address. The address’s owner, however, might become a miner as well, but other miners could again agree to ignore further movement of coins from the address in question. The higher concentration and centralization of miners’ capital, the easier it is for them to reach an agreement.

One doesn’t have to identify themselves to get a bitcoin address, contrary to what happens when one wishes to open a bank account. However, it doesn’t mean that there’s no way to find out which bitcoins you own.

Bitcoin Is Not Anonymous

Lack of anonymity in bitcoin isn’t news these days. Bitcoin transactions are pseudonymous, they’re recorded on a global public blockchain, and services like Chainalysis, Coinvalidation and Elliptic make this pseudonymity quite fragile. Regular bitcoin mixers, according to the authors of Bitcoin and Cryptocurrency Technologies, can’t guarantee non-traceability of transactions. Even the official blog blog says that if you really want to conceal your transactions, Shared Coin and other CoinJoin implementations are not for you.

The race of arms continues, and solutions like MimbleWimble and Mixcoin may become game changers here, but today the entire state of affairs isn’t in favor of anonymity advocates.

Offchain Transactions as Means to Enhance Privacy

Offchain solutions enhance privacy of transactions by minimizing their trail in the blockchain. For example, when you use Lightning Network, only the transactions opening and closing the channel make it to the blockchain. In this case, a blockchain browser shows which addresses opened the channel, the dates of the channel’s opening and closure, and initial and final balances of the parties. The information on transactions within the channel will not be displayed.

Unfortunately, this doesn’t make transactions anonymous and non-traceable. Your counterparty has the entire history of payments, each of which is linked to the addresses that had opened the channel. Many customers don’t like it when vendors gather data on their purchases.

You don’t have to open a payments channel with everyone you want to pay in the LN. For that purpose, you would have had to deposit lots of bitcoins in the channels, and to pay lots of fees, which is both inconvenient and expensive. A path of payment channels between counterparties is quite enough: user A may pay user C without opening a direct channel if there’s an A-B-C path between them, i.e. thereŃŤs an intermediary B who has channels open for both A and C. ThatŃŤs the foundation of business model in Lightning Network: they invest bitcoins in payments channels and earn from fees.

Intermediaries make Lightning Network easier to use but less private. Concentration and centralization of capital is also possible in Lightning Network. Big nodes that had invested a lot in multiple channels may collectively gather info on their customers and, just like miners, agree to blacklist some addresses.

There are anonymity solutions being developed for offchain transactions, like Bolt and TumbleBit, but as long as theyŃŤre not implemented, anonymity fans will find no redemption in payment channels as well.

What Do We Do Then?

So, bitcoin is not anonymous. ThereŃŤs no hope for cryptocurrencies promoted as anonymous either, not just because there might be a bug in the code, or some secret agreement. The main risk here is that pseudonymous bitcoin is legal now, while operations with non-traceable cryptocurrencies are most likely to be banned, which can entail certain financial and legal ramifications for their holders.

So, in the end we’ll have to deal with offchain transactions in a pseudonymous cryptocurrency. The less the trail in the blockchain, the higher the privacy level. transactions in Lightning Network leave minor trace, and are trustless, yet the issue of intermediaries is still burning. Additionally, such transactions require additional devices and internet access, which means more expenses.

Offline transactions might run win bitcoin notes, i.e. obligations and bonds. However, vouchers are not cash, but cashless bitcoins. It’s but a promise to provide bitcoins, which might as well never be kept.

It seems that the most reliable way to ensure privacy in bitcoin transactions is to never send them online, never have a wallet and keep away from the internet. Funnily enough, it’s quite possible.

Private Keys as Anonymous Cash of Tomorrow

In order to send bitcoins, you don’t have to send them to the recipient’s address. You may just give them the private key to the end address. Key is not an obligation, but a means of access to the bitcoins. You store keys, not bitcoins, in the wallet, and those keys are transferrable both online and offline, with no fees involved.

Giving away a private key offline requires no transactions, opening/closing payments channels, using additional devices, and even internet access. Transaction occurs by handing an item to a different person, which allows one to use ‘clean’ bitcoins without losing said ‘cleanliness.’ Clean bitcoins are those whose only transaction recorded on the blockchain is coinbase.

Of course, one may argue that internet access in necessary to check the bitcoin address’ balance and correspondence of the private key to said address.

Firstly, it’s quite unlikely that manufacturers of physical bitcoins of minor denominations like BTCC would risk their reputation and leave a vulnerability allowing their employees to steal 0.1 BTC from you. Still, there’s a risk that BTCC could decide to use all the keys at once. But there’s a trustless solution by Opendime. Using it, however, implies that you’re able to tell a fake key from a real one, or that you trust the one who pays you with the key.

There’s nothing unusual in such trust. We don’t rigorously check modern-day paper money every time we receive the notes. Even gold coins weren’t checked at each transaction. A coin as a standard gold piece stamped by an authoritative issuer was to simplify exchange by removing the need to check the gold every single time.

One could counterfeit paper money, gold coins, and even bitcoin. It’s an endless arms race between honest issuers and forgers. Bitcoin lacks nation state’s protection as a legal tender, and in this sense it’s less trustworthy than national currencies. However, there’s nothing incredible in the idea that a nation state could tackle the issue of forged bitcoins just like it tackles counterfeiting of other financial assets.

Secondly, using internet to check the balance or validity of a private key isn’t the same as using internet to transact in Lightning Network. Handing ‘physical bitcoins’ requires no trust to Lightning Network code, and it doesn’t need a steady internet connection. You don’t even have to have a bitcoin wallet, which becomes of more importance in the light of possible stiffening of KYC regulations for wallet providers and exchanges.

So, good old cash, along with all its advantages that make it so attractive, is here to stay. If bitcoin is digital cash, then a physical bitcoin, i.e. a private key stored on a small carrier, is the analog cash of tomorrow.

by Dmitri Bondar

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