Quote from: tryexcept on March 15, 2016, 11:28:22 PM

However if you reuse your address it would make it quite evident to external people that _your_ address is with a very high probability not the change and likely the other address used is my change.

One for that one single transaction. If you wallet is generating new addresses for each change output, nobody is even going to know it's you making the transaction to my re-used address in the first place.

When doing blockchain analysis to link addresses together, there are two types of links: Links that are 100% guaranteed to be the identified person, and links that are only thought to be an identified person according to a probability. Each time you move coins to a newly generated change address, you're decreasing the probability that those funds belong to you from the perspective of someone trying to do analysis.

If you buy BTC from Coinbase, and then send those coins directly to the Silk Road, Coinbase is going to know with 100% certainty that you made that transaction, and they could report you to the police. If you instead sent that coin to a separate address, then send them to the Silk Road, then there is plausible deniability. That intermediate address could be another person, it also could be your own address. Coinbase can't do anything about it because they can't be 100% sure. The court system works under the premise of reasonable doubt. The intermediate address creates enough reasonable doubt to make this not be a privacy leak.

To use the naked picture analogy, moving your coins to a new address is like blurring a naked picture of yourself. Each time your funds moves addresses, a stronger blur is applied. If somebody publishes a naked picture of you that is blurred, is that a violation of privacy? This is sort of a philosophical question.

Sending coin to an address that is being re-used is technically decreasing the probability that its you since the change address is not ambiguous, but it doesn't destroy your privacy, it merely decreases it slightly. Its like somebody taking a blurry naked picture and making it slightly less blurry. Its still blurry so you're still private.