Let’s look at a nice trick that goes along with digital signatures. The idea is to take a public key, one of those public verification keys from a digital signature scheme, and equate that to an identity of a person or an actor in a system. If you see a message with a signature that verifies correctly under a public key, pk, then you can think of this as pk is saying the message. You can literally think of a public key as kind of like an actor, or a party in a system who can make statements by signing those statements. From this viewpoint, the public key is an identity. In order for someone to speak for the identity pk, they must know the corresponding secret key, sk.
A consequence of treating public keys as identities is that you can make a new identity whenever you want — you simply create a new fresh key pair, sk and pk, via the generateKeys operation in our digital signature scheme. pk is the new public identity that you can use, and sk is the corresponding secret key that only you know and lets you speak for on behalf of the identity pk. In practice, you may use the hash of pk as your identity since public keys are large. If you do that, then in order to verify that a message comes from your identity, one will have to check (1) that pk indeed hashes to your identity, and (2) the message verifies under public key pk.
Moreover, by default, your public key pk will basically look random, and nobody will be able to uncover your real world identity by examining pk.4 You can generate a fresh identity that looks random, that looks like a face in the crowd, and that only you can control.
Decentralized identity management. This brings us to the idea of decentralized identity management. Rather than having a central authority that you have to go to in order to register as a user in a system, you can register as a user all by yourself. You don’t need to be issued a username nor do you need to
inform someone that you’re going to be using a particular name. If you want a new identity, you can just generate one at any time, and you can make as many as you want. If you prefer to be known by five different names, no problem! Just make five identities. If you want to be somewhat anonymous for a while, you can make a new identity, use it just for a little while, and then throw it away. All of these things are possible with decentralized identity management, and this is the way Bitcoin, in fact, does identity. These identities are called addresses, in Bitcoin jargon. You’ll frequently hear the term address used in the context of Bitcoin and cryptocurrencies, and that’s really just a hash of a public key. It’s an identity that someone made up out of thin air, as part of this decentralized identity management scheme.
Sidebar. The idea that you can generate an identity without a centralized authority may seem counterintuitive. After all, if someone else gets lucky and generates the same key as you can’t they steal your bitcoins?
The answer is that the probability of someone else generating the same 256‐bit key as you is so small that we don’t have to worry about it in practice. We are for all intents and purposes guaranteed that it will never happen.
More generally, in contrast to beginners’ intuition that probabilistic systems are unpredictable and hard to reason about, often the opposite is true — the theory of statistics allows us to precisely quantify the chances of events we’re interested in and make confident assertions about the behavior of such systems.
But there’s a subtlety: the probabilistic guarantee is true only when keys are generated at random. The generation of randomness is often a weak point in real systems. If two users’ computers use the same source of randomness or use predictable randomness, then the theoretical guarantees no longer apply. So it is crucial to use a good source of randomness when generating keys to ensure that practical guarantees match the theoretical ones.
On first glance, it may seems that decentralized identity management leads to great anonymity and privacy. After all, you can create a random‐looking identity all by yourself without telling anyone your real‐world identity. But it’s not that simple. Over time, the identity that you create makes a series of statements. People see these statements and thus know that whoever owns this identity has done a certain series of actions. They can start to connect the dots, using this series of actions to infer things about your real‐world identity. An observer can link together these things over time, and make inferences that lead them to conclusions such as, “Gee, this person is acting a lot like Joe. Maybe this person is Joe.”
In other words, in Bitcoin you don’t need to explicitly register or reveal your real‐world identity, but the pattern of your behavior might itself be identifying. This is the fundamental privacy question in a cryptocurrency like Bitcoin, and indeed we’ll devote the entirety of Chapter 6 to it.
