Dr. Benjamin Beckmann, CTO of Midnight, contends that Web3 was supposed to put the users in charge. In the process, it has unintentionally exacerbated issues with data exposure. As he pointed out in a recent guest post on CryptoSlate, Dr. Beckmann focuses on the fact that cryptocurrency transactions are pseudonymous. He makes the case that superior data analysis techniques will allow companies to identify and track users—an invasion of their privacy that Web3 was supposed to shield. His analysis shows there is an immediate demand for privacy-focused solutions on building this Web3 ecosystem. These solutions are important to addressing risks and ensuring protection of user data.

Dr. Beckmann's article delves into how bad actors can exploit the inherent characteristics of blockchain technology to compromise user privacy. He underscores the need for creating privacy-by-design systems that minimize data shareability from the start. He believes that this new approach is what’s needed to finally unleash the full power of Web3. At the same time, it protects users against economic surveillance and harms.

The Illusion of Anonymity in Cryptocurrency Transactions

Cryptocurrency transactions, though usually thought of as anonymous, are actually pseudonymous. On the blockchain, every transaction is linked to a single wallet address. Together, this string of characters prevents user identification. As Dr. Beckmann explains, these wallet addresses can be mapped across time to uncover trends and relationships.

By tracking transaction flows and analyzing behavioral patterns, third parties can infer a user's identity and track their financial activity. Don’t forget, humans tend to re-use wallet addresses. They are used by mostly innocent, legitimate users who use more centralized exchanges that need KYC data. Once a wallet address is linked to a real-world identity, all that changes. Now suddenly, all of their past and future transactions associated with that address are in their possession.

This is a powerful capability that poses an existential threat to user privacy. It opens the door to monitoring of private businesses’ spending habits, investment strategies, and other sensitive financial information. Dr. Beckmann cautions that this excessive surveillance has chilling effects—from personalized ads all the way to discriminatory practices.

Phishing Attacks Exploit Metadata Vulnerabilities

The threats to user privacy go far past on-chain analysis. Bad actors are using more advanced phishing tactics to leverage these metadata vulnerabilities and gain access to user data.

Dr. Beckmann references a recent case in which hackers were able to send more than 23,000 phishing emails trying to take advantage of metadata. These phishing emails were specifically crafted with the intention to fool users into providing private crypto wallet information. Once attackers gain access to this information, they can easily use it to steal funds and hijack users’ identities.

These attacks highlight the need for user education as a top priority. They highlight the need for powerful security protections such as defenses against phishing and other social engineering attacks. Dr. Beckmann is clear that crypto users need to be on the lookout to safeguard their private keys and personal info.

Privacy-by-Design: A Path Forward

To help counter the increasing privacy risks in Web3, Dr. Beckmann has been pushing for more privacy-by-design systems to be created and widely adopted. These systems are architected from the ground up to reduce data accessibility and safeguard user privacy.

Privacy-by-design employs a number of different techniques to safeguard sensitive information. These are zero-knowledge proofs, secure multi-party computation, and differential privacy, all of which allow for secure and private transactions and data sharing. By implementing these technologies, Web3 applications can better allow end-users to have increased control and transparency over their data. This protects against the risk of intrusive future surveillance.

Dr. Beckmann is an advocate of privacy-by-design as an important requirement for developing a user-centric Web3 ecosystem. When developers prioritize privacy from the very beginning, they can build exceptional applications that maintain user empowerment and protect personal data.