Non anonymous cryptocurrency
These claim to offer enhanced security features or options that help to keep users' identities and activities concealed. Key Takeaways Despite the sophisticated encryption and privacy features employed to protect user anonymity, full anonymity is unlikely to be guaranteed by any cryptocurrency as most blockchain transactions are recorded and accessible on the public ledger.
Certain methods exist, such as the cryptocurrency mixer CoinJoin, to obscure one's identity or transaction history on Bitcoin, but this requires some technical know-how and comes with transaction fees. Several other cryptocurrencies have built-in privacy features or options that users can enjoy for more private online commerce. Monero Monero's XMR popularity has been on the rise, primarily due to its ability to help anonymize users. Monero transactions are much more difficult to trace because they use ring signatures and stealth addresses.
These methods help to hide the identities of the sender and the receiver. Additionally, Ring Confidential Transactions, or RingCT, helps to conceal the transaction amount, providing more privacy. Zcash has implemented a cryptographic tool called Zero-Knowledge Proof and grants participants an option to shield transactions. It allows participants to transact without any of them revealing their addresses to the other s.
Zero-Knowledge Proof also obfuscates the transaction amount. The feature works by obscuring the origins of your funds. Choosing to use the feature will slightly raise the fee for the transaction. DASH achieves this through a mixing protocol utilizing an innovative decentralized network of servers called master nodes. However, sending funds from a Z-Address to a T-Address will show the amount received. Horizen also boasts a vast node network, which helps to improve anonymity. That made it the rd largest cryptocurrency.
On the other hand, I2P encrypts user data before sending it through an anonymous, peer-to-peer, and volunteer-run globally distributed network. It allows hiding the locations and IP addresses of the transacting participants. Verge made headlines when a popular adult website adopted it to start accepting cryptocurrency payments.
Other examples might be if an old hard disk is thrown away. Other software installed on the same computer such as malware can also read from disk or RAM to spy on the bitcoin transactions made by the user. For privacy don't leave data on your computer available to others. Exactly how depends on your threat model. Encryption and physical protection are options, as is using special operating systems like Tails OS which does not read or write from the hard drive but only uses RAM, and then deletes all data on shutdown.
Methods for improving privacy non-blockchain Obtaining bitcoins anonymously If the adversary has not linked your bitcoin address with your identity then privacy is much easier. Blockchain spying methods like the common-input-ownership heuristic , detecting change addresses and amount correlation are not very effective on their own if there is no starting point to link back to. It works far better than any actual technology like CoinJoin. Cash trades Physical cash is an anonymous medium of exchange, so using it is a way to obtain bitcoin anonymously where no one except trading partners exchange identifying data.
Note that some services still require ID so that is worth checking. Some services require ID only for the trader placing the advert. As of late there is at least one decentralized exchange open source project in development which aims to facilitate this kind of trading without a needing a centralized third party at all but instead using a peer-to-peer network. Cash-in-person trades are an old and popular method. Two traders arrange to meet up somewhere and the buyer hands over cash while the seller makes a bitcoin transaction to the buyer.
This is similar to other internet phenomena like Craigslist which organize meetups for exchange. Escrow can be used to improve safety or to avoid the need to wait for confirmations at the meetup. Cash-by-mail works by having the buyer send physical cash through the mail. Escrow is always used to prevent scamming.
The buyer of bitcoins can be very anonymous but the seller must reveal a mail address to the buyer. Cash-by-mail can work over long distances but does depend on the postal service infrastructure. Users should check with their local postal service if there are any guidelines around sending cash-by-mail.
Often the cash can also be insured. Cash deposit is a method where the buyer deposits cash directly into the seller's bank account. Again escrow is used , and again the buyer of bitcoins can be near-anonymous but the seller must sign up with a bank or financial institution and share with them rather invasive details about one's identity and financial history. This method relies on the personal banking infrastructure so works over long distances.
Cash dead drop is a rarely used method. It is similar to a cash-in-person trade but the traders never meet up. The buyer chooses a location to hide the cash in a public location, next the buyer sends a message to the seller telling them the location, finally the seller picks up the cash from the hidden location.
Escrow is a requirement to avoid scamming. This method is very anonymous for the buyer as the seller won't even learn their physical appearance, for the seller it is slightly less anonymous as the buyer can stalk the location to watch the seller collect the cash. Cash substitute Cash substitutes like gift cards, mobile phone credits or prepaid debit cards can often be bought from regular stores with cash and then traded online for bitcoin.
Employment Bitcoins accepted as payment for work done can be anonymous if the employer does not request much personal information. This may work well in a freelancing or contracting setting. Although if your adversary is your own employer then obviously this is not good privacy. Mining Mining is the most anonymous way to obtain bitcoin. This applies to solo-mining as mining pools generally know the hasher's IP address. Depending on the size of operation mining may use a lot of electrical power which may attract suspicion.
Also the specialized mining hardware may be difficult to get hold of anonymously although they wouldn't be linked to the resulting mined bitcoins. Stealing In theory another way of obtaining anonymous bitcoin is to steal them. In May a hacker known as Phineas Fisher [25] hacked a spyware company that was selling surveillance products to dictators [26].
The hacker used bitcoin stolen from other people to anonymously rent infrastructure for later attacks. Spending bitcoins anonymously If you give up your delivery address which you'll have to if you're buying physical goods online then that will be a data leak. Obviously this is unavoidable in many cases. Wallet history synchronization Bitcoin wallets must somehow obtain information about their balance and history.
As of late the most practical and private existing solutions are to use a full node wallet which is maximally private and client-side block filtering which is very good. One issue with these technologies is that they always costs more resources time, bandwidth, storage, etc than non-private solutions like web wallets and centralized Electrum servers. There are measurements indicating that very few people actually use BIP37 because of how slow it is [27] , so even client-side block filtering may not be used very much.
Full node Full nodes download the entire blockchain which contains every on-chain transaction that has ever happened in bitcoin. So an adversary watching the user's internet connection will not be able to learn which transactions or addresses the user is interested in.
This is the best solution to wallet history synchronization with privacy, but unfortunately it costs a significant amount in time and bandwidth. Private information retrieval In cryptography, a private information retrieval PIR protocol is a protocol that allows a user to retrieve an item from a server in possession of a database without revealing which item is retrieved. This has been proposed as a way to private synchronize wallet history but as PIR is so resource-intensive, users who don't mind spending bandwidth and time could just run a full node instead.
Client-side block filtering Client-side block filtering works by having filters created that contains all the addresses for every transaction in a block. The filters can test whether an element is in the set; false positives are possible but not false negatives. A lightweight wallet would download all the filters for every block in the blockchain and check for matches with its own addresses. Blocks which contain matches would be downloaded in full from the peer-to-peer network , and those blocks would be used to obtain the wallet's history and current balance.
Address query via onion routing Wallet histories can be obtained from centralized servers such as Electrum servers but using a new Tor circuit for each address. A closely-related idea is to connect together Electrum servers in an onion-routing network [28]. When creating such a scheme, care should be taken to avoid timing correlation linking the addresses together, otherwise the server could use the fact that the addresses were requested close to each other in time.
Countermeasures to traffic analysis Bitcoin Core and its forks have countermeasures against sybil attack and eclipse attacks. Eclipse attacks are sybil attacks where the adversary attempts to control all the peers of its target and block or control access to the rest of the network [29]. For each peer, the node keeps a list of transactions that it is going to inv to it. It sends inv's for transactions periodically with a random delay between each inv.
Transactions are selected to go into the inv message somewhat randomly and according to some metrics involving fee rate. It selects a limited number of transactions to inv. The algorithm creates the possibility that a peered node may hear about an unconfirmed transaction from the creator's neighbours rather than the creator node itself [35] [36] [37] [38]. However adversaries can still sometimes obtain privacy-relevant information.
Encrypting messages between peers as in BIP would make it harder for a passive attacker such as an ISP or Wifi provider to see the exact messages sent and received by a bitcoin node. Tor and tor broadcasting If a connection-controlling adversary is a concern, then bitcoin can be run entirely over tor. Tor is encrypted and hides endpoints, so an ISP or Wifi providers won't even know you're using bitcoin. The other connected bitcoin nodes won't be able to see your IP address as tor hides it.
Bitcoin Core and its forks have features to make setting up and using tor easier. Some lightweight wallets also run entirely over tor. Running entirely over tor has the downside that synchronizing the node requires downloading the entire blockchain over tor, which would be very slow. Downloading blocks over Tor only helps in the situation where you want to hide the fact that bitcoin is even being used from the internet service provider [39]. It is possible to download blocks and unconfirmed transactions over clearnet but broadcast your own transactions over tor , allowing a fast clearnet connection to be used while still providing privacy when broadcasting.
Dandelion Dandelion is another technology for private transaction broadcasting. The main idea is that transaction propagation proceeds in two phases: first the "stem" phase, and then "fluff" phase. During the stem phase, each node relays the transaction to a single peer. Even when an attacker can identify the location of the fluff phase, it is much more difficult to identify the source of the stem. They can also be used to broadcast transactions with more privacy, because peers in the privacy protocols can send each other unconfirmed transactions using the already-existing protocol they use to interact with each other.
For example, in JoinMarket market takers can send transactions to market makers who will broadcast them and so improve the taker's privacy. This can be a more convenient for the taker than setting up Tor for use with tor broadcasting. Receiving bitcoin data over satellite At least one bitcoin company offers a satellite bitcoin service [45].
This is a free service where satellites broadcast the bitcoin blockchain to nearly anywhere in the world. If users set up a dish antenna pointing at a satellite in space, then they can receive bitcoin blocks needed to run a full node. As the satellite setups are receive-only nobody can detect that the user is even running bitcoin, and certainly not which addresses or transactions belong to them.
As of the company offers a paid-for API which allows broadcasting any data to anywhere in the world via satellite, which seems to be how they make their money. But it appears the base service of broadcasting the blockchain will always be free. Some techniques are trivial and are included in all good bitcoin wallets. Others have been implemented in some open source projects or services, which may use more than one technique at a time.
Other techniques have yet to be been implemented. Many of these techniques focus on breaking different heuristics and assumptions about the blockchain, so they work best when combined together. Avoiding address reuse Addresses being used more than once is very damaging to privacy because that links together more blockchain transactions with proof that they were created by the same entity.
The most private and secure way to use bitcoin is to send a brand new address to each person who pays you. After the received coins have been spent the address should never be used again. Also, a brand new bitcoin address should be demanded when sending bitcoin. All good bitcoin wallets have a user interface which discourages address reuse.
It has been argued that the phrase "bitcoin address" was a bad name for this object because it implies it can be reused like an email address. A better name would be something like "bitcoin invoice". Bitcoin isn't anonymous but pseudonymous, and the pseudonyms are bitcoin addresses.
Avoiding address reuse is like throwing away a pseudonym after its been used. Bitcoin Core 0. When an address is paid multiple times the coins from those separate payments can be spent separately which hurts privacy due to linking otherwise separate addresses. If someone were to send coins to an address after it was used, those coins will still be included in future coin selections.
Avoiding forced address reuse The easiest way to avoid the privacy loss from forced address reuse to not spend coins that have landed on an already-used and empty addresses. Usually the payments are of a very low value so no relevant money is lost by simply not spending the coins. Another option is to spend the coins individual directly to miner fees. It signs all the UTXOs together with other people's and spends them to miner fees.
Coin control Coin control is a feature of some bitcoin wallets that allow the user to choose which coins are to be spent as inputs in an outgoing transaction. Coin control is aimed to avoid as much as possible transactions where privacy leaks are caused by amounts, change addresses, the transaction graph and the common-input-ownership heuristic [48] [49].
An example for avoiding a transaction graph privacy leak with coin control: A user is paid bitcoin for their employment, but also sometimes buys bitcoin with cash. The user wants to donate some money to a charitable cause they feel passionately about, but doesn't want their employer to know.
The charity also has a publicly-visible donation address which can been found by web search engines. If the user paid to the charity without coin control, his wallet may use coins that came from the employer, which would allow the employer to figure out which charity the user donated to.
By using coin control, the user can make sure that only coins that were obtained anonymously with cash were sent to the charity. This avoids the employer ever knowing that the user financially supports this charity.
Multiple transactions Paying someone with more than one on-chain transaction can greatly reduce the power of amount-based privacy attacks such as amount correlation and round numbers. Privacy-conscious merchants and services should provide customers with more than one bitcoin address that can be paid. Change avoidance Change avoidance is where transaction inputs and outputs are carefully chosen to not require a change output at all.
Not having a change output is excellent for privacy, as it breaks change detection heuristics. Change avoidance is practical for high-volume bitcoin services, which typically have a large number of inputs available to spend and a large number of required outputs for each of their customers that they're sending money to. This kind of change avoidance also lowers miner fees because the transactions uses less block space overall.
An example is when opening a Lightning Network payment channel. Another example would be when sweeping funds into a cold storage wallet where the exact amount may not matter. Multiple change outputs If change avoidance is not an option then creating more than one change output can improve privacy. This also breaks change detection heuristics which usually assume there is only a single change output.
As this method uses more block space than usual, change avoidance is preferable. Script privacy improvements The script of each bitcoin output leaks privacy-relevant information. Much research has gone into improving the privacy of scripts by finding ways to make several different script kinds look the same.
As well as improving privacy, these ideas also improve the scalability of the system by reducing storage and bandwidth requirements. ECDSA-2P is a cryptographic scheme which allows the creation of a 2-of-2 multisignature scheme but which results in a regular single-sig ECDSA signature when included on the blockchain [51]. One side effect is that any N-of-N [54] and M-of-N multisignature can be easily made to look like a single-sig when included on the blockchain.
Adding Schnorr to bitcoin requires a Softfork consensus change. As of a design for the signature scheme has been proposed [55]. The required softfork consensus change is still in the design stage as of early Scriptless scripts are a set of cryptographic protocols which provide a way of replicating the logic of script without actually having the script conditions visible, which increases privacy and scalability by removing information from the blockchain [56] [57] [58] [59].
With scriptless scripts, nearly the only thing visible is the public keys and signatures. More than that, in multi-party settings, there will be a single public key and a single signature for all the actors. Everything looks the same-- lightning payment channels would look the same as single-sig payments, escrows, atomic swaps , or sidechain federation pegs.
Pretty much anything you think about that people are doing on bitcoin in , can be made to look essentially the same [60]. It improves privacy and scalability by removing information from the blockchain [61] [62]. The Schnorr signature can be used to spend the coin, but also a MAST tree can be revealed only when the user wants to use it. The schnorr signature can be any N-of-N or use any scriptless script contract. The consequence of taproot is a much larger anonymity set for interesting smart contracts, as any contract such as Lightning Network , CoinSwap , multisignature , etc would appear indistinguishable from regular single-signature on-chain transaction.
The taproot scheme is so useful because it is almost always the case that interesting scripts have a logical top level branch which allows satisfaction of the contract with nothing other than a signature by all parties. Other branches would only be used where some participant is failing to cooperate. Graftroot is a smart contract scheme similar to taproot. It allows users to include other possible scripts for spending the coin but with less resources used even than taproot. The tradeoff is that interactivity is required between the participants [64] [65] [66].
It can be used in certain situations to create a more private timelock which avoids using script opcodes. For example, a user can publish a ECDH address as a donation address which is usable by people who want to donate. An adversary can see the ECDH donation address but won't be able to easily find any transactions spending to and from it.
However ECDH addresses do not solve all privacy problems as they are still vulnerable to mystery shopper payments ; an adversary can donate some bitcoins and watch on the blockchain to see where they go afterwards, using heuristics like the common-input-ownership heuristic to obtain more information such as donation volume and final destination of funds.
ECDH addresses have some practicality issues and are very closely equivalent to running a http website which hands out bitcoin addresses to anybody who wants to donate except without an added step of interactivity. It is therefore unclear whether ECDH are useful outside the use-case of non-interactive donations or a self-contained application which sends money to one destination without any interactivity.
Centralized mixers This is an old method for breaking the transaction graph. Also called "tumblers" or "washers". A user would send bitcoins to a mixing service and the service would send different bitcoins back to the user, minus a fee. In theory an adversary observing the blockchain would be unable to link the incoming and outgoing transactions. There are several downsides to this.
The mixer it must be trusted to keep secret the linkage between the incoming and outgoing transactions. Also the mixer must be trusted not to steal coins. This risk of stealing creates reputation effects; older and more established mixers will have a better reputation and will be able to charge fees far above the marginal cost of mixing coins. Also as there is no way to sell reputation, the ecosystem of mixers will be filled with occasional exit scams.
There is a better alternative to mixers which has essentially the same privacy and custody risks. A user could deposit and then withdraw coins from any regular bitcoin website that has a hot wallet. As long as the bitcoin service doesn't require any other information from the user, it has the same privacy and custody aspects as a centralized mixer and is also much cheaper.
Examples of suitable bitcoin services are bitcoin casinos, bitcoin poker websites, tipping websites, altcoin exchanges or online marketplaces [67]. The problem of the service having full knowledge of the transactions could be remedied by cascading several services together. A user who wants to avoid tracking by passive observers of the blockchain could first send coins to a bitcoin casino, from them withdraw and send directly to an altcoin exchange, and so on until the user is happy with the privacy gained.
Main article: Mixing service CoinJoin CoinJoin is a special kind of bitcoin transaction where multiple people or entities cooperate to create a single transaction involving all their inputs. It has the effect of breaking the common-input-ownership heuristic and it makes use of the inherent fungibility of bitcoin within transactions.
The CoinJoin technique has been possible since the very start of bitcoin and cannot be blocked except in the ways that any other bitcoin transactions can be blocked. Just by looking at a transaction it is not possible to tell for sure whether it is a coinjoin. CoinJoins are non-custodial as they can be done without any party involved in a coinjoin being able to steal anybody else's bitcoins [68]. By looking at the amounts and assuming that the two entities do not pay each other it is obvious that the 2 BTC input ends up in the 2 BTC output, and the same for the 3 BTC.
They could have come from either input. This is the crux of how CoinJoin can be used to improve privacy, not so much breaking the transaction graph rather fusing it together. The privacy gain of these CoinJoins is compounded when the they are repeated several times. As of late CoinJoin is the only decentralized bitcoin privacy method that has been deployed.
Examples of likely CoinJoin transactions IDs on bitcoin's blockchain are d3e1dfd1fdf82f36bc1bf44dbdf2debcbee3f6cb22a and f6eeaa8cee2df42b99cff7fafcfff1f Note that these coinjoins involve more than two people, so each individual user involved cannot know the true connection between inputs and outputs unless they collude. PayJoin Main article: PayJoin The type of CoinJoin discussed in the previous section can be easily identified as such by checking for the multiple outputs with the same value.
It's important to note that such identification is always deniable, because somebody could make fake CoinJoins that have the same structure as a coinjoin transaction but are made by a single person. PayJoin also called pay-to-end-point or P2EP [69] [70] [71] is a special type of CoinJoin between two parties where one party pays the other. The transaction then doesn't have the distinctive multiple outputs with the same value, and so is not obviously visible as an equal-output CoinJoin. Another way to interpret this transaction is that the 2 BTC input is owned by a merchant and 5 BTC is owned by their customer, and that this transaction involves the customer paying 1 BTC to the merchant.
There is no way to tell which of these two interpretations is correct. The result is a coinjoin transaction that breaks the common-input-ownership heuristic and improves privacy, but is also undetectable and indistinguishable from any regular bitcoin transaction. If PayJoin transactions became even moderately used then it would make the common-input-ownership heuristic be completely flawed in practice.
As they are undetectable we wouldn't even know whether they are being used today. As transaction surveillance companies mostly depend on that heuristic, as of there is great excitement about the PayJoin idea [72]. CoinSwap Main article: CoinSwap CoinSwap is a non-custodial privacy technique for bitcoin based on the idea of atomic swaps [73].
If Alice and Bob want to do a coinswap; then it can be understood as Alice exchanging her bitcoin for the same amount minus fees of Bob's bitcoins, but done with bitcoin smart contracts to eliminate the possibility of cheating by either side. CoinSwaps break the transaction graph between the sent and received bitcoins.
It is possible to have CoinSwaps that are completely indistinguishable from any other transaction on the blockchain. They could be said to allow bitcoins to teleport undetectably to anywhere else on the blockchain. Non-CoinSwap transactions would benefit because a large-scale analyst of the blockchain like a transaction surveillance company could never be sure that ordinary transactions are not actually CoinSwaps.
They also do not require much block space compared to the amount of privacy they provide. CoinSwaps require a lot of interaction between the involved parties, which can make this kind of system tricky to design while avoiding denial-of-service attacks. They also have a liveness requirement and non-censorship requirement, meaning that the entities taking part must always be able to freely access the bitcoin network; If the internet was down for days or weeks then half-completed CoinSwaps could end with one side having their money stolen.
In of February , MercuryWallet was the first implementation has been deployed [74] [75]. It allows for any number of entities to between them create a so-called proposed transaction graph PTG which is a list of connected transactions. In the PTG the bitcoins belonging to the entities are sent to and fro in all the transactions, but at the end of the PTG they are all returned to their rightful owners.
The system is set up so that the process of the PTG being mined is atomic, so either the entire PTG is confirmed on the blockchain or none of it is, this means none of the participating entities can steal from each other. The proposed transaction graph has the freedom to be any list of transactions that obfuscate the transaction graph. For best results the PTG would perfectly mimic the natural transaction graph due to normal economic activity in bitcoin, and so an adversary would not know where the PTG started or ended, resulting in a massive privacy gain.
Unlike CoinSwap there is no liveness or non-censorship requirement so funds are secure even if bitcoin is under temporary censorship. However CoinJoinXT uses a lot of block space compared the privacy gain. TumbleBit TumbleBit is privacy technology which is non-custodial and where the coordinating server cannot tell the true linkage between input and output. This is achieved by a cryptographic construct where the server facilitates a private exchange of digital signatures. The protocol is very interesting to any privacy and bitcoin enthusiast.
From the point of view of an observer of the blockchain, TumbleBit transactions appear as two transactions with many in the author's example outputs and all transaction outputs must be of the same amount. Off-chain transactions Off-chain transactions refer to any technology which allows bitcoin transactions on a layer above the blockchain. Bitcoin payments done off-chain are not broadcast to every node in the network and are not mined and stored forever on a public blockchain, this automatically improves privacy because much less information is visible to most adversaries.
With Off-Chain Transactions there are no public addresses, no address clusters, no public transactions, no transaction amounts or any other privacy-relevant attacks that happen with on-chain transactions. Lightning Network is a huge topic in bitcoin privacy so it is discussed in its own section. Blinded bearer certificates This is another way of doing Off-Chain Transactions which is based on blind signatures.
The payments through such a system would be very very private. It has been known about since But the system is custodial so as the issuing server is a central point of failure which can steal all the money. However the concept may still be useful in certain situations where Lightning is not, for example blinded bearer certificates support payments where the receiver is offline. Main article: Blinded bearer certificates Sidechains Sidechains are when another blockchain is created which uses bitcoins as its currency unit.
Bitcoins can be moved from the main bitcoin blockchain onto the sidechain which allows them to transact following different consensus rules. Sidechains can have different and better privacy properties than the regular bitcoin blockchain. Main article: Sidechain StateChains StateChains are a cryptographic structure that consists of a chain of digital signatures transfering ownership of a specific statecoin a bitcoin UTO between owners.
Similar to a blockchain or sidechain, the statechain acts as immutable cryptographic proof of ownership and a proof that a statecoin bitcoin UTXO has not been double spent. Confidential transactions Main article: Confidential transactions Confidential transactions CT is a cryptographic protocol which results in the amount value of a transaction being encrypted. The encryption is special because it is still possible to verify that no bitcoins can been created or destroyed within a transaction but without revealing the exact transaction amounts.
Confidential transactions requires a softfork consensus change to be added to bitcoin, although they could be added to a sidechain too. Discussion Privacy vs scalability Many of the previously-mentioned privacy technologies work by adding extra data to the bitcoin blockchain which is used to hide privacy-relevant information. This has the side-effect of degrading the scalability of bitcoin by adding more data which must be handled by system.
This harms privacy because full nodes become more resource-costly to run and they are the most private way for a user to learn their history and balance. Adding data to blocks also degrades the security of the system , and there isn't much point in having a private bitcoin if the poor security leads to it being successfully attacked and destroyed.
The resource cost of using more block space is shown to the user as a higher miner fee ; so privacy technology which uses too much block space may not even be used much if users find the fees too expensive. During the period of high block space demand in late, low-value JoinMarket CoinJoin transactions mostly disappeared as did most low-valued bitcoin transactions.
Off-Chain Transactions are one way to avoid this trade-off between privacy and scalability. These kind of solutions improve privacy by entirely removing data from the blockchain, not by adding more decoy data. Change avoidance and Script privacy improvements also reduce costs to the system while improving privacy.
PayJoin does not use much extra block space over making an ordinary transaction; relative to the gain of breaking the common-input-ownership heuristic it is very space-efficent. CoinSwap uses very little block space relative to privacy, as it can be understood as an off-chain transaction system which makes a single transaction and then comes back on-chain.
Confidential transactions requires a lot of block space along with associated bandwidth and CPU costs, but its privacy gain is substantial, so the debate on that topic could go either way. In the long term as bitcoin miner fees go up, resource-costly privacy technologies will be priced out and replaced by resource-efficient ones. Steganography Steganography is used in cryptography to mean the act of hiding the fact that something is being hidden. For example the content of an encrypted message cant be read by an eavesdropper but it still shows that something is being hidden.
Steganographic encryption of a message can be done by embedding an encrypted message into an audio file or image which hides the message in the noise. An equal-output CoinJoin hides the source and destination of a certain coin, but the structure of the transactions reveals that something is being hidden.
So even though coinjoin breaks the common-input-ownership heuristic , the fact that equal-output coinjoins can be detected even if the detection is imperfect allows them to be excluded from by the adversary's analysis. Also the distinguishability of the coinjoins may attract suspicion and prompt more investigation.
The idea of steganography is a good thing to aim for [78]. It greatly increases the privacy because the transactions made by such technology cannot be distinguished from regular transactions. Also it improves the privacy of users who don't even use the technology, as their transactions can always be confused with actual private transactions. Scriptless scripts are a great example of a steganographic privacy technology where the privacy-relevant information is hidden in the random numbers of the digital signatures.
PayJoin , CoinSwap and CoinJoinXT are good steganographic privacy technologies because they can be made indistinguishable from regular bitcoin transactions. Equal-output coinjoins and TumbleBit are not steganographic.
Also it is usually easy to see when a centralized Mixing service is being used with common-input-ownership heuristic analysis, but depositing and then withdrawing from a high-volume bitcoin website like a casino or altcoin exchange is better because its possible that the user simply wanted to gamble. Lightning Network Lightning Network is an off-chain transaction technology based on payment channels.
It has nearly the same security model as bitcoin on-chain transactions. It is not an overstatement to say that Lightning Network is a revolution for bitcoin. See the previous section on Off-chain transactions. As well as greatly improving privacy, Lightning Network transactions are also much faster usually instant and cheaper than on-chain transactions. Lightning nodes create two-way payment channels between them, and lightning transactions are routed from one node to another.
The source and destination node don't need to have a payment channel directly between them as transactions can be routed over many intermediate nodes. As Lightning Network transactions happen off-chain, they are not broadcast to every node in the network and are not stored forever in a publicly-visible blockchain. Adversaries cannot look at a public permanent record of all transactions because there isn't one.
Instead adversaries would possibly have to run intermediate nodes and possibly extract information that way. However Lightning Network may introduce other privacy problems, mostly due to how the network is made up of nodes having connections between them [79]. The parts of this network which can be intermediate routing nodes are usually public, and this network information could be overlaid with information about routed packets such as their amount.
Lightning nodes also reveal their IP addresses unless run over Tor, and the payment channels are made up of on-chain transactions which could be analyzed using regular blockchain analysis techniques. Payment channels look like 2-of-2 multisignature on the blockchain.
Bilaterial closing transactions look like the 2-of-2 outputs have been spent, but unilateral close transactions have a complicated HTLC scripts that is visible on the blockchain. As of Lightning is in beta and development continues; the development community is still studying all its privacy properties. Certainly its privacy is better than the privacy of on-chain transactions. Onion routing The Lightning protocol uses onion routing [80] [81] to improve privacy from the intermediate routing notes.
The protocol is aimed to prevent intermediate nodes along a payment route learning which other nodes, besides their predecessor or successor, are part of the packet's route; it also aims to hide the length of the route and the node's position within it. Onion routing overlaid with network topology Lightning Network's onion routing is usually compared with Tor onion routing.
However, Tor's network is fully-connected; every node on Tor is directly connected or has the potential to directly connect with every other node, meaning that an onion-routed packet can be relayed from and to potentially any other node. This is not so in the Lightning Network, where payment channels do not fully-connect the entire network, and where the network topology is publicly known for routing nodes.
Data fusion of the network topology and the small amount of information from onion-routed packets may still be enough to uncover information in certain cirumstances [82] [83]. For example, if a Lightning node wallet has only a single payment channel connection going to one intermediate node, then any payments sent to and from the node wallet will have to pass through the intermediate node, which would be able to obtain a lot of information about the wallet node's payments regardless of the onion-routing used.
A mitigation to this topology problem may be that the entire topology of the Lightning Network is not known. Only nodes which intend to route transactions need to be publicly announced. It is possible for "private channels" to exist which are payment channels that exist, but whose existence is not published.
This doesn't mean the onion routing used by Lightning Network is useless, far from it, but the privacy is not as strong as with Tor. Rendez-vous routing Onion routing from the sender still requires that the destination Lightning node is known to the sender along with all associated information like channel UTXO.
This would mean that a user cannot receive Lightning payments without revealing one or more UTXOs associated with their payment channels. A solution is rendez-vous routing [84] [85] , also called Hidden Destinations [86] , which allow Lightning payments to be sent from a source node to destination node without either the source or destination needing to reveal their nodes and associated information. A good analogy is that source onion routing is like a Tor connection going via a Tor exit node to its destination, and rendez-vous onion routing is like a Tor connection going to a Tor hidden service.
Atomic Multipath Payments Atomic Multipath Payments AMP is a protocol in Lightning which allows a single payment to be routed over multiple lightning network transactions [87]. For example if a user has five channels each with balance 2 btc, they can send a single payment of 7 btc using the AMP protocol over multiple lightning network paths.
In terms of privacy, AMP would result in intermediate nodes not observing the full payment amount of 7 btc but only the partial payment amounts of 2 btc or 1 btc or any other combination. This is positive for privacy as routed payments would no longer leak the exact payment amount, but only a lower bound. Common hashlock value For non-AMP payments, the payment hash is the same for all nodes along the route of a payment.
This could allow multiple nodes if they co-operate to know that they routed the same payment based on this common hash value. Although this could also be done using the timestamp of each routed payment. Scriptless scripts used as a replacement to explicit hash time locked contracts can be used to solve the common hashlock problem. It is possible to add a different random tweak value to the committed random value at each step, as a result there can be a multi-hop path through payment channels in which individual participants in the path wouldn't be able to tell that they're in the same path unless they're directly connected because of this re-blinding [88] [89].
A paper called Concurrency and Privacy with Payment-Channel Networks [90] [91] writes about a scheme using zero-knowledge proofs which would allow each hash value in the payment route to be different. The scheme is much more expensive in terms of computation, but it may still be practical. Custodial wallets Lightning-enabled wallets can be of the custodial type, where the wallet is just a front-end that connects to a back-end server run by some company.
This is the same situation for web wallets in the on-chain bitcoin ecosystem. This kind of setup would result in all the user's Lightning Network transactions being visible to that company and so they would have no privacy, in the same way that using a web wallet has no privacy for the on-chain bitcoin space.
As of Zap Wallet and Lightning Peach work on this model. Peach wallet actually has checkboxes in its GUI saying "I agree to the privacy policy" and looking through the privacy policy reveals the wallet tracks all kinds of privacy-relevant stuff. Needless to say a privacy-conscious user shouldn't use these kind of lightning wallets but use non-custodial lightning wallets instead [92]. Lightning-enabled wallets still need to interface with the underlying bitcoin network, which can leak privacy-relevant information if done incorrectly.
For example, if the wallet obtains blockchain transaction information from a centralized server then that server can spy on all the channel opening and closing transaction. Privacy-aware lightweight wallets usually make use of Client-side block filtering which is a very good fit for Lightning Network -enabled wallets. Private script types Advances in script type privacy like Schnorr , scriptless scripts, taproot and ECDSA-2P benefit Lightning Network privacy by making its payment channel blockchain transactions appear indistinguishable from regular single-signature blockchain transactions.
Probing payments to reveal channel states The balance state of each channel is hidden from the public and is only known to the two entities making up the payment channel. This provides a lot of privacy, as amounts and changes of the amounts are not visible to all.
A possible way to defeat this privacy is for an active adversary to send probing payments until the balance is obtained. Such attack has been proved possible, as described in a paper from the beginning of [93] , due to the level of detail that lightning implementations provide about routing errors. Although it would seem that such attack would need to pay the routing fees for the probing payments, the attacker may provide a fake invoice, so even when the payment passes through all the route, the last node will send back an error message and will not be able to execute the payment.
So the cost for such attack is reduced to the fees needed to open and close the channels used for the attack. Such an attack can be used for disclosing the balances of a single or a selected group of nodes of the network and even on a large scale to obtain the balance of each channel in the network.
In case the adversary repeats this procedure for every payment channel in the entire Lightning Network and continues probing very frequently, then by watching the change in channel states, they could observe payment being routed around the network. A possible way to remedy this attack would be for routing nodes to randomly for example 1-out-of times return a routing error even if the channel balance state is actually adequate.
This likely would not degrade the user experience of Lightning Network much, but would impose a serious cost on the attacker. Existing privacy solutions This section is about bitcoin software which implements privacy features as its main goal, especially avoiding the privacy leaks due to the blockchain. Privacy cannot be easily separated from any other aspect of bitcoin. It is unusual to have entirely separate solutions only for privacy, the dream is that one day all bitcoin wallets will include privacy tech already built in.
But as of late many privacy implementations are separate applications. The network itself can be used on bitcoin mainnet and several merchants and other projects accept it. It is still not usable by the general public. It is expected that one day every bitcoin wallet will be able to send and receive lightning network transactions and so the massive privacy benefits will be included in how regular users use bitcoin all the time.
Lightning Network wallets usually the standard privacy tech like Deterministic wallets and warnings against address reuse. Some LN wallets such as Zap Wallet and Lightning Peach are actually custodial, they are backed by a centralized server which can spy on everything the user does, so they should be avoided.
This can be very flexible as the coinjoins can take any number of forms. It might be practical in between bitcoin merchants, several of whom might decide to coinjoin together some of their transactions so that the common-input-ownership heuristic would imply they are all the same wallet cluster.
JoinMarket JoinMarket is an implementation of CoinJoin where the required liquidity is paid for in a market. In JoinMarket terminology there are liquidity taker users who can create a coinjoin for whatever amount they want at any time, they also pay a small coinjoin fee. Liquidity makers are online 24 hours a day and are ready to create a coinjoin at any time for any amount they can, in return they earn coinjoin fees from liquidity takers. Because of this market for coinjoins, JoinMarket users can create coinjoins at any time and for any amount up to a limit based on available liquidity.
Other people are always available for coinjoining because they earn fees, and coinjoins can be of any amount and happen at any time. JoinMarket can also be a small source of income for operators of liquidity maker bots, who earn coinjoin fees by allowing other people to create coinjoins with their bitcoins. Privacy is greatly improved by repeating coinjoins many times, for this reason the JoinMarket project includes the tumbler script where coinjoins are automatically created at random times and for random amounts.
Bitcoins can be deposited into the JoinMarket HD wallet and the tumbler script will send them via many coinjoins to three or more destination addresses. This feature of using more than one destination address is required to beat amount correlation. For example a user who wants to deposit coins into an exchange would make use of the Generate New Deposit Address button to obtain more than one destination address , the exchange may then combine those coins with deposits from other customers which should resist any tracking based on amounts.
JoinMarket can interface with a Bitcoin Core full node in order to privately obtain the history of its own wallet. There is also an option to use Electrum server, but users are discouraged from using it. There are plans to replace the Electrum interface with one that uses Client-side block filtering. The software is an open source project with a community based around it.
Unfortunately JoinMarket can be difficult to install for people not used to Linux or the command line interface. It is hoped one day there may be work done to make this easier, but as all development is done by volunteers there can be no roadmap for this. The package includes built-in Tor and, by default, all traffic between the clients and the server goes through it, so IP addresses are hidden and privacy of the users is respected. Under normal conditions, Wasabi Wallet never leaves Tor onion network and it never uses Tor exit relays, significantly decreasing the network attack surface.
Wasabi also includes all standard privacy tech like a Hierarchical Deterministic wallet and address reuse avoidance, as well as mandatory coin control and labeling. The wallet uses BIP Client-side block filtering to obtain its own transaction history in a private way and it has a one-click partial full node integration as it ships with Bitcoin Knots. If the user already has a Bitcoin full node on a local or remote device, then it is possible to specify the IP address and port, or the Tor onion service, and Wasabi will use it to verify and enforce rules of Bitcoin.
In addition to this, it has advanced cutting-edges features like:.
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