The difference between pseudonymity and anonymity: When zero is more 

Blockchain is a generational technology that is fundamentally changing how we communicate, interact and transact by merging those three activities as no one had envisioned before Satoshi published his seminal paper 14 years ago.

At a basic level, distributed blockchain architecture is simply a new way of storing data. But at its core are transparency and immutability that are unlocking a cascade of new functionalities and potential. These two attributes make blockchain particularly well-suited for use cases like international financial settlement, nonfungible tokens, or supply chain management. However, for numerous mainstream scenarios that Web3 will need to address to satisfy the broadest segment of users, a data layer that demands this degree of transparency is a nonstarter. 

Blockchain isn’t as private as you may think

Possibly because of the ever-present and enthralling stories of cryptocurrency being used to execute black market transactions without detection, people tend to think that blockchains are more private than they really are. If they were truly anonymous, blockchains would completely mask user identities and actions so that they could not be linked to individual people. However, that is not what blockchains typically provide.

Instead of anonymity, blockchains offer pseudonymity. To be pseudonymous is to use a false name or persona to hide your real identity. For example, Alexander Hamilton, James Madison and John Jay wrote under the pseudonym “Publius” to promote the United States Constitution. 

Similarly, blockchain-based applications don’t require users to share personal identifiers like name, social security number, etc. This can feel deceptively like anonymity, but the truth is nearly the opposite. On the blockchain, instead of anonymity, every transaction identifies its participants by a crypto wallet address, which becomes more personalized with each additional transaction it becomes attached to. In short, anyone who transacts with a person’s wallet on a public blockchain can immediately access every action that wallet’s owner has ever taken for as long as that chain exists. 

Some transactions should remain private, even in a digital world

As we live more of our lives online, most of us have accepted that we will have to sacrifice some amount of our personal privacy to participate in the digital world. Whether it’s our phones tracking and recording our real-time locations in exchange for navigation, search engines maintaining a history of our queries in exchange for convenient access to information, or email services parsing our messages to offer us more relevant advertising, consumers increasingly understand that these “free” services are rendered at the cost of their data.

Nevertheless, there are cases where the need for privacy still prevails. For example, revealing our medical data — especially in a way that is permanently and publicly viewable — would still be unacceptable to most of us. 

For better or worse, as the data layer for Web3, traditional blockchains are perfectly transparent. With blockchain-based applications, it’s not only your ISP or search engine that has visibility into what you’re doing. It’s everyone. This represents a massive departure from the existing web architecture, in which, though you may not have a choice in what data you reveal, you are at least only revealing it to a single counterparty.

On a public blockchain, your information is visible to everyone. For certain use cases, like supply-chain auditability, contact tracing or government accountability, this may make sense. But for the average user seeking to preserve some semblance of confidentiality, it is a daunting price to pay. 

Furthermore, especially as Web3 utilities become more composable and interconnected, pseudonymity will be increasingly inadequate. The larger the web of information associated with a wallet address, the more vulnerable it is to exposing the individual behind it. At least some degree of privacy is a must for the mainstream use cases that users and institutions will want to employ decentralized blockchain-based solutions. The question of privacy becomes not one of philosophy, but security. Pseudonymity is inadequate protection for institutions that store privileged information. 

Zero-knowledge provides just enough information for proof

Fortunately, there is a new technology that presents a solution: zero-knowledge proofs. So-called zero-technology allows individuals to prove the truth of an asserted fact without revealing anything beyond that fact. This is analogous to someone proving they are old enough to buy a beer without having to reveal all the other irrelevant personal information on their driver’s license. As a result, it allows individuals to expose information only as it becomes necessary. 

Applying zero-knowledge to public blockchains lets us achieve flexible privacy, compliance and scalability. The combination of these blockchains with zero-knowledge technologies can enable use cases like self-sovereign identification, so, for example, someone could prove they have passed a health requirement, earned a degree, etc., without revealing any other irrelevant information. Similarly, self-sovereign identity could lead to more secure forms of secure digital voting that reveal only the verified candidate selection while maintaining the anonymity of the individual voters. 

In short, zero-knowledge technology enables the programmability of blockchains while enabling users to truly own and protect the data that is most important to them. This technology has immense implications for the viability of the emerging Web 3 sector, and the broader web, too. 

Alex Pruden is the chief operating officer atAleo.

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