Are Cryptocurrencies and Web3 Really Decentralised and Private?

Photo by Kanchanara on Unsplash

My interest in cryptocurrencies was reignited when a traditional bank blocked my account. I was having some work done on my home, and the payments for this work were made in three stages:

1. Deposit
2. Work started
3. Work completed

Each stage had a separate invoice, which required a different reference to link the payments to the invoice.

Most traditional banks require you to set up a ‘new payee’ if you need a different reference.

On the other hand, online banks allow you to change the reference for every transaction.

So, I decided to transfer a relatively small amount (much less than the daily maximum) to an online account.

The transfer was stopped, my account was blocked, and I received a call from the bank.

As I didn’t initiate this call, I refused to answer any questions and said that I would phone the bank on a number I knew was genuine.

I was asked many detailed, personal and private questions, and it took me quite some time to find out why the transfer was blocked.

The reason was that the online bank also sold cryptocurrencies. (At that time, I only held £10 worth of cryptocurrencies.)

As a result of all this, I decided to research cryptocurrencies and Web3, which is also based on the blockchain concept.

A blockchain is a list of validated blocks, each linking to its predecessor all the way back to the first (Genesis) block. Transactions in this global double-entry bookkeeping ledger encode the transfer of value between participants in a peer-to-peer network. A record of every transaction is kept on the blockchain.

A Web3 blog keeps a record of all posts on a blockchain.

Decentralisation

Cryptocurrencies

If you hold cryptocurrencies in a self-custody ‘wallet’, nobody can stop you from paying a third party or block your wallet. In this sense, cryptocurrencies are truly decentralised.

The problem comes when you want to fund your wallet. You can do this with decentralised exchanges (DEXs), but the cost can be higher. The average DEX charges 0.3% per trade, which is higher than Centralised Exchange (CEX) trading fees which are usually around 0.1% per trade.

Additionally, transactions take several seconds on an Ethereum DEX, and transfer (gas) fees are usually around $10 but can cost $100 or more during congested periods.

Binance has some of the lowest DEX charges. You could store your currencies in Binance’s wallet, but as this is centralised, you may want to transfer your funds to a decentralised wallet. Some currencies can be slow to transfer and expensive, but Bitcoin Cash (BCH) is fast and has low transfer fees.

Unfortunately, Binance doesn't make it easy to pay for your cryptocurrencies. They only accept Visa-not even Mastercard-and they don't accept Visa debit cards from every verified bank! It appears that they only accept cards from traditional high street banks!

If you have the technical expertise and the funds to pay large electricity bills, you could mine (mint coins and validate transactions) cryptocurrencies yourself.

Web3 blogs

If you have the technical expertise, you can set up your own Web3 blog. However, most people rely on third-party groups to do this for them.

An example of this is Hive which is run by a group of ‘Witnesses’. Witnesses are equivalent to nodes (miners and their computers) on the blockchain.

Although Hive’s witnesses are independent and decentralised, its users are controlled. Here are a couple of examples:

I accidentally linked to a URL using HTTP instead of HTTPS. Posts must be closely monitored because I got the following notification:

I also published an article with a note saying that it had been previously published on my website. I then got the following notification:

This Web3 blog was beginning to feel more restrictive than Medium and other platforms.

My own website is completely unrestricted, and I take responsibility for my own actions.

Privacy

To be fair, nobody has ever claimed that cryptocurrency transactions are private. The blockchain, where coins are minted and transactions are verified, is a permanent, open record of these transactions. This also applies to Web3 dApps like Hive, where posts are also stored in a blockchain and can never be deleted.

Know Your Customer

If you use a centralised exchange to buy or trade cryptocurrencies, you must undergo ‘Know Your Customer’ (KYC) or ‘Vet Your Customer’, as I call it.

This involves a series of identity checks, a questionnaire about your income and a test of your knowledge risks.

Some exchanges will accept you, and others will refuse you. You will not be able to find out why you were refused.

There are none of these hassles with decentralised exchanges.

Travel Rules

The UK’s Financial Conduct Authority (FCA) introduced the ‘Travel Rule’ on 1 September 2023. This introduction is part of the FCA’s cryptoasset anti-money laundering regime.

The ‘Travel Rule’ requires FCA-registered cryptoasset service providers to share specific transaction details, including sender and recipient identities which could involve a delay of up to 5 minutes while data is being verified.

Privacy Coins

Monero is one of the privacy coins that make it harder to trace transaction history without specialised tools and resources. It uses three techniques:

1. Ring signatures,
2. Stealth Addresses and
3. RingCT (Ring Confidential Transactions).

Ring Signatures are a type of group signature that hides the transaction history by associating each transaction input to not one but many possible equally valid outputs. This number of possible outputs is called the Ring Size of the transaction, while an outside observer cannot tell which of the possible signers in a signature belongs to your account.

Stealth Addresses are used to hide recipient addresses. While the recipient can always give the same address to every sender, this address generates a different, one-time address to use each time a transaction is made. Thus, transactions are unlinkable, as nobody can prove that two transactions have the same recipient.

Regulators opposed to such financial privacy have issued guidance about the ‘risks’ of privacy coins. This has led many exchanges to delist or avoid listing them.

This contrasts with Bitcoin, where all transaction details, user addresses, and wallet balances are public and transparent.

Web3 dApps

When a story is ‘upvoted’ on Hive, the writer is awarded 50% Hive Tokens (HIVE) and 50% Hive Power (HP), amongst other tokens. If you go to a writer’s profile page and look at their wallet, you can view all the assets that they hold — no privacy there!

Conclusions

Photo by Mario Verduzco on Unsplash

Decentralisation and privacy are like the golden yolks of eggs — full of optimism and hope — but they have a shell of regulations and third-party intervention. You can break the shell, but you do so at your peril.

Photo by Ye Jinghan on Unsplash