Why Do Some Crypto Wallets Generate New Addresses? – Preventing Dustin

Bitcoin is a decentralized digital currency and a Peer-to-Peer Electronic Cash System, without a central bank or single administrator.

To guarantee the security of this system in a decentralized way, transactions are verified by nodes distributed around the world that run the history of all transactions that have already occurred in a public distributed ledger called a blockchain.

Bitcoin Mining

Bitcoins are created as a reward for a process known as mining. In mining, huge computational power is used to verify the validity of the transactions that are made. Due to the amount of energy and computing power required, the network is able to ensure the veracity of transactions without any central authority. As long as 51% of the network validators keep working for the network, it will be safe.

In addition, system participants use a cryptography system of public keys and private keys that guarantee the security of funds and the privacy of system users. That is, despite all transactions being public, there is no way in the system to link the portfolio keys to their holders.

In summary, the Bitcoin protocol ensures the validity of the network through miners, nodes, and cryptography, and ensures the possibility of anonymity for network participants.

Fraud on Blockchain

However, although Bitcoin has never been hacked or defrauded, there are numerous attacks that can put users in danger, exposing their identities to malicious agents. It is important to point out that the exposure comes mainly from the misuse of users or the use of services that require KYC and not the Bitcoin protocol itself.

To solve the problems arising from the ”human misuse of the protocol”, numerous privacy-focused crypto services are constantly improving the design of their products and offering more robust privacy solutions.

Privacy as a Right

Although many people believe that anonymity is only desired by criminal agents, anonymity has an essential value when considering government confiscation, a censure of dictatorial countries with unstable economies. Anonymity guaranteed an innate right, the right to privacy. And if we think about it, historically, both transactions and conversations have always been private. This has only recently started to change. And with that, the need for technologies that guarantee the guarantee of privacy was born.

In 1991, cypherpunk Philip R. Zimmermann, creator of the PGP key wrote:

The right to privacy is implicitly distributed throughout the Bill of Rights. […] Two hundred years ago, all conversations were private. If someone was within earshot, you could just go to the back of the barn and have a conversation there. No one could hear without your knowledge. The right to private conversation was a natural right, not just in the philosophical sense, but in the sense of the law of physics, given the technology of the time.

Dusting Attack

A dusting attack is an attack in which a very small amount of crypto (dust) is sent to thousands of Bitcoin addresses in order to trace them. The purpose of this attack is to use the dust to track the activity of these addresses and “unmask” or deanonymize certain cryptocurrency users, mainly targeting whales.

Criminals can use the attack for phishing scams and extortion. Governments can carry out the attack to connect a person or group to an address. Or the dust attack can simply be done by blockchain analysis companies for academic purposes.

How to Avoid Dusting Attacks?

Because blockchain addresses are public, anyone can be a victim of a dust attack. However, there are two ways to prevent this attack and ensure your privacy – use Hierarchical-deterministic wallets and not waste the dust.

Hierarchical-deterministic (HD) wallets and Generate New Addresses

The first way is using hierarchical-deterministic (HD) wallets. HD wallets were implemented in 2012 with BIP 32, creating a new, safer, and easier-to-use key structure.

Previously, non-deterministic (ND) bitcoin wallets generated random key pairs to be used as receive addresses. In other words, for each new address, a backup of the keys is necessary. HD wallets have a pair of master keys: an extended public key (XPUB) and an extended private key (XPRIV) that determine all others. Thus, users can automatically generate new addresses for each transaction, but different backups are not required.

UTXO

Every Bitcoin transaction always generates new UTXOs (unspent transaction outputs). You can’t stop someone from sending you dust, but you can mark it as “don’t spend”. By not using them, you neutralize the attack, and no one will know how the balances are being used.

And most HD wallets make it difficult, if not impossible, to share sensitive information like your master key pair.

By using a hierarchical-deterministic (HD) wallet, which creates new addresses every time you make a transaction and sets the dust’s UTXO, you make it very difficult, if not impossible, for the ”attacker” to follow your moves.

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