Privacy is a bit of a complex topic in BTC (BTC). While the mainstream press have frequently referred to the cryptoasset for a form of anonymous money for the internet, the truth is that each BTC trade made on the base blockchain coating is completely public and saved on tens of thousands of computers across the world.
When there are no real world identities that must be tied into the pseudonymous addresses used from the BTC system, the truth is that blockchain analysis firms like Chainalysis can figure out most of the identities supporting BTC transactions through on-chain analysis and collaborations with different crypto custodians. This ability for surveillance businesses to determine what’s really happening on the BTC blockchain is an indication that there’s still lots of work to do if it comes to improving user privacy in the computer system.
Nevertheless, there have been a range of different privacy improvements made to BTC over the years, and much more are on the manner in 2021. While Wasabi Wallet and Samourai Wallet are famous options for utilizing the BTC network in a more privacy-conscious manner through the use of their CoinJoin implementations, in addition, there are new innovations such as Taproot, CoinSwap, plus many different layer-two protocols that may offer improvements over the popular CoinJoin model.
Let us take a good look at the condition of BTC privacy in 2021 and where things are headed.
A better foundation with Taproot
Of course, the biggest story for BTC at 2021 in a technical level is that the Taproot soft fork. This BTC improvement is really a mix of 3 BTC Improvement Proposals (BIPs) in the form of Taproot, Tapscript, and Schnorr signatures. These technological changes contain lots of benefits for BTC, most especially in the areas of privacy and intelligent contracts.
Rather than numerous signatures being added into the blockchain whenever a trade is sent from a multisig address, all of the related signatures are aggregated into one. This means that multisig transactions, whether they’re a 2-of-3 multisig invest or the launching of a Lightning Network station, can be made to seem no different than an easy, single-signature BTC trade. It should be noted that the typical BTC user with a single-signature address additionally benefits from this particular setup, as it is now unclear when their transactions are simple BTC spends or something a lot more complicated.
In the long term, it’ll be beneficial to move each of the various types of on-chain BTC transactions to one anonymity setnevertheless, it ought to be noted that, at least over the near term, Taproot may actually reduce privacy, since it’s developing a new transaction type that may further split the anonymity sets found with BTC transactions on the blockchain.
While Taproot is seen as a favorable development for BTC privacy overall, it doesn’t have many consequences for the CoinJoin-focused software that is widely deployed and used today.
According to BTC Teleport and JoinMarket developer Chris Belcher, there aren’t any benefits of Taproot into CoinJoin-enabled BTC software like Samourai Wallet, Wasabi Wallet, and JoinMarket out of lowering the entire load on the network via quicker transaction verification. But, Taproot is a bit more useful to get a particular BTC privacy protocol that’s been implemented in JoinMarket, known as SNICKER.
In accordance with pseudonymous Samourai Wallet developer TDevD, Whirlpool is still the main focus, and the CoinJoin implementation was recently opened to denominations of 100,000 satoshis (USD 39). In addition to this, Samourai Wallet is focusing on enhancements to their Cahoots-style transactions and the integration of an upgraded version of reusable payments codes.
In accordance with Wasabi Wallet inventor Adam Fiscor, Taproot is not particularly useful for that bit of software, therefore it isn’t a focus at this time. Instead, the wallet is concentrated on the transition from version 1.0 to version 2.0. Fiscor summarized the differences between these two versions of Wasabi Wallet at a tweet thread back in March. In conclusion, the intent with Wasabi Wallet 2.0 is to make the software faster and cheaper with a better user interface.
It should be recalled that Taproot can also be considered a building block for a future improvement that would be beneficial for CoinJoin in the form of cross-input key aggregation. This could allow for each of the inputs in an CoinJoin trade to be aggregated into one signature, thus lowering the total cost of a CoinJoin trade for many users involved with them. In fact, a BTC consumer’s participation in a collaborative CoinJoin trade could have a lower cost than an on-chain, single-signature trade in a situation where cross-input signature aggregation were enabled on the network.
Though Taproot isn’t immediately relevant to this commonly-used BTC privacy pockets of now, it is nevertheless a foundational shift to the BTC network that can be useful with privacy overall and enable further improvements in the future.
While it’s important to keep in mind that this shift has not yet been locked in over the BTC network, signs are that over the necessary 90% of this network hashrate is ready to activate the shift later this season.
While CoinJoin is still the standard alternative for pushing back against adversaries tracking the movement of capital across the BTC network, Belcher has proceeded on to an alternate method for improving BTC privacy in the form of CoinSwap, that was originally described by former Blockstream Chief Technology Officer Greg Maxwell at a 2013 Bitcointalk post. Belcher’s job in this field has been funded by two different grants from Square Crypto and the Human Rights Foundation.
A vital problem with CoinJoin transactions now is they stand out like a sore thumb to anybody who is considering the BTC blockchain. It’s also possible that CoinJoin transactions could be blindsided by miners on the BTC network itself.
By way of instance, Marathon Digital Holdings is a new mining pool that is meant to be fully compliant with US financial regulations and has censored several transactions. Of course, these transactions are only censored in cubes made by Marathon Digital Holdings. Other miners are still free to incorporate the transactions in their cubes, and it would take the cooperation of 51% of the miners to censor BTC transactions at the network level.
The major invention with CoinSwap is that it breaks the assumption that a blockchain observer can track the motion of coins by simply taking a look at the blockchain.
When constructed properly, multiple BTC consumers are efficiently able to atomically swap the trade histories of their coins via a CoinSwap. Additionally, a blockchain observer can’t tell the difference between a normal BTC trade and a CoinSwap. It follows that ordinary users who aren’t even interested in doing a CoinSwap also profit, as it is possible their normal-looking trade is really a CoinSwap.
While the current, work-in-progress execution of CoinSwap, known as BTC Teleport, doesn’t utilize Taproot, in addition, there are a few marginally beneficial changes that can be made into the machine once that improvement has been activated on the BTC network. In Belcher’s opinion, users of JoinMarket (and other CoinJoin jobs ) will move over to BTC Teleport once the software is further improved, but he also admits it will ultimately be up to the market to decide what’s most useful. Specifically, Belcher explained that some users may prefer to utilize CoinJoin in scenarios where it is desirable to publicly prove that a UTXO’s (unspent trade output’s) trade history has been broken.
For Samourai Wallet, CoinSwap is viewed more as another feature as opposed to a replacement for CoinJoin.
„We’ve tested CoinSwap and have reasoned that its use with unmixed UTXOs is of little interest,“ TDevD informed Cryptonews.com. „In fact, it introduces some real risks for the user being handed a UTXO resulting from what could be considered a problematic history. As such, CoinSwap is much more suited to post-mix spending and will find a spot alongside our other post-mix spending resources.“
Though there have been lots of flame wars between the Samourai and Wasabi camps on social media, it appears they largely agree in regards to combining CoinJoin and CoinSwap together.
„CoinSwaps can provide better privacy after prevalent Taproot adoption, but CoinJoins are cheaper and quicker,“ explained Fiscor. „I would speculate that the privacy Wasabi CoinJoins can provide is more than adequate for anybody, but it’s also possible that there’s a strong market niche for CoinSwaps. The mix appears to be interesting though: CoinSwaps to from CoinJoins, which could create low anonymity set CoinJoins getting as much privacy as a CoinSwapper would.“
CommerceBlock’s Mercury Wallet is a new bitcoin wallet that combines the concept of CoinSwap with a layer-two BTC technologies known as Statechains. The idea behind Statechains is that consumers are able to transfer ownership of UTXOs without touching the base BTC blockchain. This permits the instant, free transport of UTXOs on a layer over the bottom BTC network. Additionally, the statecoins, that are one-to-one pegged with bitcoin, issued on a Statechain can be swapped between users to boost privacy. This is the particular functionality that’s been built into Mercury Wallet.
Even though a key drawback of Statechains is that consumers need to transfer complete UTXOs and can’t split them into smaller quantities, this issue may be less relevant to people who just want to combine their coins. The concept with Mercury Wallet is that consumers can swap their coins within an off-chain environment, so that the fees on such swaps can be effectively zero and can result in much larger anonymity sets than what is found with one on-chain CoinJoin today. However, because only complete UTXOs can be redeemed via this procedure, it means real world transactions are likely to be made via a different mechanism.
„I believe Statechains aren’t that useful since they lose the divisibility of this coin,“ said Belcher. „Divisibility is an essential property of cash exactly like fungibility. But maybe the tradeoff is going to be worth it at the conclusion, I don’t know.“
In accordance with CommerceBlock CEO Nicholas Gregory, Schnorr signatures could be helpful to get Mercury Wallet’s execution of Statechains. „The Schnorr execution that accompanies Taproot would help us much since we are in a position to add more Statechain thing signing secrets, [that is] something we can not do with ECDSA. Schnorr scales really well here.“
In other words, Schnorr signatures enhance the safety of Statechains since they efficiently enable a multisig setup for the thing behind a Statechain, which could be divided into multiple keys to boost security or federate control over the platform.
BTC’s Layer-2 vs Monero
These extra layers built on top of the base BTC blockchain come with various tradeoffs in terms of trust and features. By way of instance, Fiscor and TDevD have criticized the federated installment found in the Liquid sidechain.
While the safety versions of sidechains and other upper-layer BTC systems can be debated, it is worth mentioning these other networks can be a way of enabling more private BTC activity. The Lightning Network has obvious privacy benefits, as transactions are processed by fewer parties (as low as two when directly connected) instead of via the public blockchain. Liquid already has Confidential Transactions, which might be even more powerful when combined with a harmonious CoinJoin implementation. Nevertheless, these programs would also benefit from privacy enhancements made at BTC’s base coating, as they still utilize the blockchain for final settlement.
In addition to various other layers built on top of this BTC network, in addition, there are a number of privacy-focused altcoins that exist, and for Samourai Wallet, one of those altcoins, Monero (XMR), is preferable to construction Bitcoin’s secondary layers.
„Lightning [Network] privacy, or the absence thereof, is now better understood and Liquid’s custodial tradeoffs and weak Confidential Transactions execution are non-starters for use for a privacy layer,“ TDevD informed Cryptonews.com.
„Given their tradeoffs, existing L2 services will not be considered by Samourai Wallet for providing serious privacy improvements. This is the reason why we would rather leverage the base protocol of Monero and explore how it can be used as a privacy L2 for specific BTC applications. XMR-BTC nuclear swaps are non-custodial, censorship resistant, permissionless and react to particular needs on both chains. We’ve identified specific applications for adoption of XMR-BTC nuclear swaps and are prioritizing their advancement .“
Monero is perhaps the sole altcoin that is occasionally given a pass by a number of the adamant BTC maximalists who do not find a need for additional cryptocurrencies out of bitcoin, and Samourai Wallet is carrying this approval of Monero to a different level. The bitcoin wallet provider lately made a financial donation to Haveno, and it is a Monero-integrated fork of decentralized bitcoin exchange Bisq. Nevertheless, based on TDevD, Samourai Wallet itself will probably remain a BTC-only wallet solution, and consumers need to use another wallet for managing Monero.
„We will continue to work on identifying and solving issues for BTC users who must innovate independently on-chain without shortcuts which aren’t as much tradeoffs as unacceptable compromises.“
Of course, a clear downside of using Monero instead of a second-layer BTC protocol is that consumers are subject to the growing volatility of the XMR cryptocurrency as long as they’re utilizing it as a mechanism to enhance financial privacy.
Whether it’s improvements to privacy in the bottom blockchain coating, new chances on layer-two networks, or tighter integrations with Monero, it is clear there is lots of work done on improving privacy for many BTC users. The exact manner in which BTC will become more private remains a bit unclear, however there are a high number of different building blocks now in development that can be united together in a manner that restricts the total amount of information readily available for the entire world to track and analyze on the people blockchain.
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