Pseudonymous, not anonymous: the crucial difference
Anonymity means transactions can’t be linked to a person or to each other. Pseudonymity means transactions are linked to a stable identifier (an address) but not directly to a person. Bitcoin and Ethereum are pseudonymous: the address acts as a pen name, and all its activity is public. The link to a human is usually made off-chain, not on.
How tracing actually works on-chain
On UTXO chains (Bitcoin)
- Transaction graph: outputs of one transaction become inputs to the next, forming a graph you can walk.
- Common-input heuristic: when multiple inputs are spent in one transaction, they almost certainly belong to the same wallet — revealing linked addresses.
- Change-address detection: heuristics infer which output is "change" back to the sender, extending the graph.
- Address reuse directly ties separate payments together.
Following a peeling chain
On account chains (Ethereum)
- Each account has a single public balance and full transaction history.
- Tracing walks interactions (transfers, contract calls, approvals) between accounts and contracts.
- Token transfers (ERC-20 events) and DEX trades are all on-chain and linkable.