Stealth Address (Cryptocurrency)

What Is a Stealth Address?

A cryptocurrency stealth address is a one-time wallet address used to create more anonymity in cryptocurrency transactions. Because cryptocurrency wallet addresses are publicly available, transactions can be traced to that address. If your name or other information is somehow associated publicly with your wallet address, transactions can be traced to you. A stealth address acts as a proxy for your wallet address.

Key Takeaways

  • Stealth addresses are a technique for obscuring public blockchain transactions by generating one-time addresses for each transaction.
  • Blockchain networks involve pseudonymous transactions, meaning once personal information is linked to a cryptocurrency key, transactions using that key can be traced on the blockchain.
  • Stealth addresses have grown in popularity due, in part, to concerns about hackers gaining access to digital wallets and stealing cryptocurrency coins.
  • Stealth addresses have faced scrutiny from regulators and tax authorities since they can be used for illicit activities.

Understanding a Stealth Address

A blockchain network is a distributed ledger similar to a shared database containing the recipient and sender's address and the transaction amount. All network participants can view this information. This is not inherently bad, but an active observer with intent can trace transactions and possibly identify parties involved.

A standard cryptocurrency transaction needs two addresses—one from each party. The transaction does not include information about address owners because the network does not record it. This lack of this data is the crucial factor behind the anonymity that should be inherent to cryptocurrency.

However, transactions are pseudonymous. The identity protection features of blockchain technology are not 100% anonymous because transactions can be tracked to the addresses involved in them. If an address owner's information is discovered, the address no longer provides anonymity.

As an example of the benefits of a stealth address, if you wish to raise funds for a charity in cryptocurrency, you may need to provide the public address to which cryptocurrency funds can be sent. This will associate your wallet address with your name, allowing others to track your transactions. They can also track where you send the funds you raise.

Stealth addresses are a deceptive tactic, like using a post office box to hide your home address. They provide an extra layer of security for cryptocurrency users.

If you were to generate a stealth address for your charity raising needs, you could have funds sent to that address without revealing your personal wallet address.

How Is a Stealth Address Different?

In a typical cryptocurrency transaction, the sender uses the recipient's wallet address to send funds. A wallet address is a public address, which can be tracked. Peter Todd proposed stealth addresses in 2014 to deal with rising concerns over this ability.

When you use a stealth address, the blockchain records the transaction and enters the proxy address—this is what hides your public address. A stealth address can be created using different protocols or mechanisms within a cryptocurrency wallet if it supports it.

There are several different mechanisms for creating stealth addresses. For example, Monero uses ring signatures and RingCT—decoy output addresses and masked addresses—to make it difficult to trace the sender. This isn't a stealth address but rather a technique to confuse would-be trackers while using stealth addresses.

Concerns About Stealth Addresses

Considering the ability of stealth addresses to confuse trackers and boost anonymity for honest cryptocurrency users, they're also an attractive option for users with dishonest or nefarious intentions.

It's important to note that most cryptocurrency users are honest ones. Chainalysis, a blockchain data analysis company, found that only 0.15% of cryptocurrency transactions were used for illicit activity in 2021, the majority of which were scams and stolen funds.

With that in mind, regulatory agencies, tax authorities, and governments are developing methods to protect honest cryptocurrency users. For example, both privacy coins and stealth addresses have been used to avoid taxes. The Internal Revenue Service (IRS) responded by initiating Operation Hidden Treasure, designed to crack down on tax evasion by cryptocurrency users.

The Department of Justice announced in October 2021 that it had created the National Cryptocurrency Enforcement Team, designed to investigate illegal activity funded by cryptocurrency.

How Do Monero Stealth Addresses Work?

Monero uses a three-tier system for privacy: ring transactions, stealth addresses, and RingCT, which act together to place your address behind another and confuse any would-be trackers.

What Is a Wallet Address?

Your wallet address is the publicly available string of randomly generated numbers that act as an address for others to send cryptocurrency to.

What Does a Cryptocurrency Address Look Like?

Depending on the cryptocurrency you use, your address is a string of alphanumeric characters. For example, the popular Antpool Bitcoin mining pool address is 12dRugNcdxK39288NjcDV4GX7rMsKCGn6B.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns not own Monero or other cryptocurrency.

Article Sources

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  1. Linux Foundation. "[Bitcoin-Development] Stealth Addresses."

  2. Monero. "How Ring Signatures Obscure Monero's Outputs."

  3. Chainalysis. "Crypto Crime Trends for 2022: Illicit Transaction Activity Reaches All-Time High in Value, All-Time Low in Share of All Cryptocurrency Activity."

  4. Minnesota Society of Certified Public Accountants. "IRS Launches Operation Hidden Treasure Targeting Unreported Crypto for Criminal, Civil Prosecution."

  5. Department of Justice. "Deputy Attorney General Lisa O. Monaco Announces National Cryptocurrency Enforcement Team."

  6. CoinMarketCap. "Bitcoin Address."

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