The following is a guest post from Shane Neagle, Editor-in-Chief of The Tokenist.
In the digital age, financial privacy has become a pressing issue as surveillance is built into every electronic transaction. Each produces bits that can be aggregated, stored, revisited, exploited, leaked, and manipulated. In theory, the Fourth and Fifth Amendments provide a bulwark against third-party interception of transactions.
But rules written on paper only have meaning if there is a will to interpret and enforce them. More robust solutions must come from hard technical sources. In addition to its scarcity being pegged at 21 million BTC, Bitcoin's fundamental appeal is that its network makes transactions inviolable.
Bitcoin mainnet accomplishes this by escalating confirmations. The first confirmation means that the transaction is included in a block on the blockchain. Every subsequent block added further embeds the transaction into the chain. By the sixth confirmation, the would-be attacker would need to mine six consecutive blocks faster than the rest of the Bitcoin mainnet combined.
Currently, this is virtually impossible given the energy consumption (hashrate) required for such a feat. This is also why Bitcoin's proof of work is essential to the underlying values of Bitcoin and proof of stake, which Greenpeace strongly promotes.
Therefore, the six-confirmation rule has become a de facto standard among developers, miners, and exchanges. Once the 6th confirmation threshold is crossed, the BTC transfer is considered “finally settled”, i.e. irreversible.
But if a transaction is private and therefore vulnerable to seizure by governments or criminals, is it really irreversible? First, let's take a look at what Bitcoin payments mean. Sho.
Understanding Bitcoin Final Settlement
Satoshi Nakamoto's peer-to-peer money transfer system revolves around proof of work. This is truly revolutionary and allows payment systems to function on their own. In other words, it is trusted because it is trustless. From initiating a transaction to making it irrevocable, the final settlement process follows multiple steps.
When a user initiates a BTC transaction, the transaction is broadcast to the Bitcoin network (mainnet) and Menpur.Bitcoin miners configure the network to form new blocks containing memory pool transactions. Each such block references the previous block and a nonce (a number used once) as a 32-bit random number.The Nonce is an important proof-of-work element because it modifies the input to the cryptographic hash function. The latter is deterministic, so having the variable nonce changes the output hash.This randomness creates a trial-and-error process in which miners must find a valid hash to add new blocks to the chain and receive rewards. The difficulty imposed by randomness results in energy consumption and ensures that miners have done their work reliably (proof of work). Other Bitcoin mainnet nodes then verify the validity of the block containing all transactions.
As a matter of past practice and analysis, the six-block confirmation rule further ensures the finality of these transactions. Due to network delays, different miners may find a valid block at the same time. In such a fork scenario, there are two blockchain states, so the longer chain is recognized as valid by the network and the conflicting chain (orphan) is ignored.
This also prevents malicious attackers from rearranging the chain to reverse transactions. How much does it cost?
According to “Actual Settlement Limit of Proof-of-Work Blockchain” paper According to Gaži, Ren, and Russell, 6 block confirmations yields a payment error guarantee of 0.48%, assuming 10 seconds of network latency and 10% adversarial computing power of the network.
Although the proportion is very low under such harsh conditions, it is still not zero, which means that the “finality” of the settlement is still probabilistic. In fact, it's statistically impossible. In that case, how should Bitcoin payments be treated?
in him paper “Probabilistic Settlement Finality in Proof-of-Work Blockchain: Legal Considerations” Hossein Nabilou of Amsterdam Law School argues that operational finality should be distinguished from legal finality.
However, since “institutional mechanisms to address the remaining risks of settlement finality require a certain level of centralization in PoW blockchains,” the solution could come from “market-driven mechanisms.” It needs to be done. In 2022, the author was pessimistic about their appearance.
Privacy gap in Bitcoin transactions
Despite pioneering the aforementioned cryptographic hash functions and the very concept of “cryptocurrency,” the cryptographic portion of Bitcoin is concerned with transaction integrity rather than privacy. The combination of a cryptographic hash function and a nonce prevents double-spending attempts, making Bitcoin payments extremely difficult to tamper with.
This cryptographic security is also important for the underlying infrastructure. Bitcoin payment processing The service relies on the immutability of the Bitcoin network to ensure secure and accurate transaction settlement.
However, due to its self-contained network nature, Bitcoin also happens to offer a pseudo-anonymity. Once an ID is associated with a Bitcoin address, that level of privacy is immediately compromised and a digital trail is left behind. This is ultimately arrest Ilya Lichtenstein and Heather Morgan were responsible for hacking the Bitfinex exchange worth about $4.5 billion in BTC in 2016.
“In a futile attempt to maintain digital anonymity, the defendants laundered the stolen funds through a maze of virtual currency transactions.”
From this perspective, Bitcoin's cryptographic hash should be understood as a digital signature (ECDSA) to verify authenticity, since all transactions are visible online. public blockchain. Does that mean that whether financial privacy is a constitutional or natural right, Bitcoin cannot provide it?
What happens if someone is in an oppressive country and P2P Bitcoin transfers are the only way to receive funds?More generally, their personal wealth is simply not suitable for public consumption. What if we think it is a thing?
Once the link between Bitcoin ownership and identity is established, it's not hard to see how it could open the door wide open for people. violent robbery or kidnapping by criminals.
Naturally, Bitcoin holders consider this lack of privacy a huge liability. Fortunately, a viable solution to enforcing Bitcoin privacy is on the horizon.
Enhancing privacy: technologies and challenges
Other than being careful to never link IDs to Bitcoin addresses or reusing a single address for multiple payments, how can public blockchains provide financial privacy?
The first answer is to upgrade bitcoin core. This already happened when the Taproot upgrade was activated in November 2021 with a block height of 709,632.
As a soft fork, Taproot had significant support among miners and was therefore less controversial than SegWith in 2017, which resulted in a hard fork of Bitcoin Cash. Taproot can mask multi-signature transactions that were distinguishable from common single-signature transactions before the upgrade.
taproot Schnorr's signature Aggregation combines multiple signatures into a single signature, making it difficult to identify all parties involved in a transaction. This also reduces valuable blockchain data and eliminates bloat, while also removing data for analysis.
Additionally, Taproot introduced MAST (Merklized Abstract Syntax Tree) to enable more complex transactions with conditions.
If the home renovation is completed within 3 days, John will receive 5 BTC from Allen.However, John does not have access to the entire 5 BTC, but only 3 BTC as a mutual understanding.If 3 BTC is spent on renovations, but the work is not completed on time, Allen will get 2 BTC back.
Time-locked conditional branching like this is possible using Taproot's MAST. Similar to Schnorr, MAST reduced the size of this information through hashing, reducing the size of the information that can be tracked. If certain conditions are not met, including any other required parties; signaturethis information is never revealed.
It is easy to see how MAST can be used in AI-powered betting markets and day trading. There, only the executed conditions are revealed on the blockchain, hiding the bettor's strategy and intentions. Similarly, MAST allows you to automate payments without intermediaries.
Beyond the Taproot upgrade, the Lightning Network is Bitcoin's most popular layer 2 scaling solution. The main purpose of LN is to batch transactions off-chain, allowing BTC transfers with negligible fees and reducing payment data visible on Bitcoin mainnet.
This trend could grow further if LN payment channels: onion routing. Unfortunately, this type of approach is too complex for the average user and increases network latency, slowing down payments. This adds further uncertainty to the finality of the settlement.
A more attractive solution for enhancing Bitcoin privacy comes from Silent Payments as a possible upgrade to Bitcoin Core.
Currently under Bitcoin Improvement Proposal (BIP) 0352The Silent Payments protocol mixes BTC transactions and makes them indistinguishable. It works by the recipient having a unique one-time static address (a reusable payment code or “stealth address”) that is generated when the sender’s wallet combines three keys.
This way, payments will never be linked to the same sender and transactions will no longer be able to be linked to this static address. The use of silent payments and address ownership are invisible to on-chain observers. More importantly, the silent payments protocol adds a data burden to the existing Bitcoin protocol, making it more scalable.
Comparison with similar privacy-oriented PayNonyms (BIP47), BIP352 eliminates the need for users to submit two transactions with fees (the first transaction must be sent as a notification) for a single payment. Similarly, BIP352 does not broadcast the wallet linked to the reusable payment code, while BIP47 only hides it.
The path to true final reconciliation
Privacy coins like Monero (XMR) have largely fallen out of the public eye. Once the EU proposed and enacted MiCA, there was no need for other countries, including Dubai, to follow suit. Similarly, major exchanges have delisted privacy coins, from Kraken and Huobi to Binance and OKX.
As a result, users will no longer be able to access statutory off/on ramps, and privacy coin At the store. This is an important lesson. Although governments cannot technically ban cryptocurrencies, they can do so very effectively by deplatforming them.
Given these developments, it is clear that many governments consider economic privacy to be outside of natural human rights. Bitcoin is exempt from this because its proof-of-work network is always transparent. But now that Bitcoin has been mainstreamed and institutionalized through Bitcoin ETFs, is it time to upgrade Bitcoin's true endgame, the privacy of Bitcoin Core, beyond taproot?
This would be consistent with the standard recognition of physical cash as an inherently anonymous asset, despite its central bank origins. Five US senators have already introduced legislation to ban central bank digital currencies (CBDCs), demonstrating the importance they place on financial privacy.
Eventually, Bitcoin should grow to a larger market cap and become an essential commodity. And when the time is right, it will be more costly to retire the platform than to lock in the next privacy upgrade.
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