Coin Tainting

Given that Bitcoin transactions basically consist of a chain of digital signatures, the expenditure of individual coins can be publicly tracked. This enables any entity to taint coins that belong to a specific set of addresses and monitor their expenditure across the network. The literature features a number of proposals that cluster Bitcoin addresses [3] and gather behavioral information about these addresses [4,11].

Coin tainting could be used to achieve a degree of accountability in the Bitcoin network; if an address misbehaves, then Bitcoin users can decide to stop interacting with the address (i.e., not accepting its coins), thus deflating the value of all the coins pertaining to that address. For instance, following a theft of 43,000 BTCs from the Bitcoin trading platform Bitcoinica, the Bitcoin service MtGox traced the stolen BTC and deactivated the accounts that were receiving the tainted coins [14].

These incidents show that powerful entities in Bitcoin can—rightfully or not—devalue the BTCs owned by specific addresses. If these entities were to cooperate with the handful of developers that have privileged rights in the system, then all Bitcoin users can be warned not to accept BTCs that pertain from a given address (e.g., using alert messages). Even worse, developers can hard-code a list of banned Bitcoin addresses within the official Bitcoin client releases, thus blocking all interactions with a given Bitcoin address without the consent of users.

Furthermore, while coin tainting can be used to punish provably misbehaving addresses, it could also be abused to control the financial flows in the network subject to government pressure, and due to social activism as well. This empowers a few powerful entities that are not necessarily part of the Bitcoin network, such as governments and activists, to regulate the Bitcoin economy. Even if all Bitcoin decisions and operations were completely decentralized—which they are not—coin tainting presents an obstacle to a truly decentralized Bitcoin.

Coin tainting can be especially detrimental if coins are not widely exchanged among Bitcoin addresses. This enables entities to damage only a specific set of addresses without alienating other addresses in the system. Other users are then also likely to boycott the tainted coins.

In [15], Gervais et al. conducted two experiments to analyze the impact of coin tainting on the Bitcoin network. In the first experiment, the authors measured the number of unspent transaction outputs (UTXO) that are affected when tainting a coinbase. Recall that a coinbase is the first transaction in a block, and attributes the block mining reward to a particular address. The authors randomly sampled 100 coinbases from the last 20,000 blocks of the blockchain that by the time of the experiment had the highest block-height at 247,054. The results show that a single coinbase tainting affects a large number of transaction outputs; on average, tainting a single coinbase affects 857,239 UTXO (with a standard deviation of 767,528), accounting for 12.9% of all possible UTXO.

In a second experiment, Gervais et al. analyzed the effect of tainting addresses belonging to a single entity in Bitcoin. Given the absence of data to identify these addresses, the authors relied on the two aforementioned heuristics in order to cluster addresses across Bitcoin entities.

As an application of this analysis, Gervais et al. [15] identified two Bit- coin addresses belonging to Torservers.net (using information available from blockchain.info). Given the knowledge of these two addresses, they were able to identify a total of 47 addresses belonging to the operator of Torservers with a total balance of 498.20 BTCs. If an external entity (e.g., a governmental institution) would like to stop the Torservers from receiving Bitcoin donations, it could taint all UTXO of the affected Bitcoin addresses. Recently, Silk Road—one of the most well known underground online black markets—was shut down by the FBI in October 2013. Note that Silk Road was only accessible through the Tor network; the FBI seized over 27,000 BTCs stored within one or more Bitcoin addresses held by Silk Road.