For criminals, bitcoin is a bad currency. The semi-anonymity of the asset makes it easier to identify someone's address and transaction. But privacy is not a criminal's patent. The importance of privacy goes beyond its direct meaning.
Fungibility is one of the important attributes of a sound currency. This means that in an economy, all coins look the same and therefore interchangeable. If there is no interchangeability, it is easy to trace back to the previous user. If the bitcoin you hold is a criminal, then the exchange may refuse to accept your funds, which will actually make your Bitcoin worth less than the “uncontaminated” SGD, such as just dug up. New currency.
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Bitcoin's shortcomings in privacy and interchangeability have long been frustrating for users and developers. Due to the scale of the Bitcoin ecosystem and the long process of Bitcoin Improvement Suggestion (BIP), we still have a long way to go from full privacy. However, Bitcoin has taken several steps in this direction at different levels. Let's take a look at some of the improvements.
The most important and most difficult form of privacy is at the protocol level. More problems are changing the protocol to confuse data such as transaction amounts and addresses on the blockchain. Often, due to the heavy data load, such improvements require sacrifices in scalability.
A confidential transaction (CT) completely hides the amount in the transaction, only the sender and receiver addresses are visible. However, the main problem with CT is the large capacity required. If implemented immediately and widely used, it will greatly reduce the throughput of Bitcoin. Fortunately, a recent breakthrough, Bulletproofs, makes CT more compact and more viable. However, because the throughput will still be reduced, it is still a problem for bulletproof technology to make sufficient efforts to optimize the trading space.
Currently, CT is only used on the side chain. Blockstream's Liquid sidechain uses CT to confuse transaction amounts and asset classes. Bitcoin is connected to Liquid through a two-way hook mechanism. However, Liquid is currently only open to exchanges and institutions, not ordinary users.
MimbleWimble is a compelling technology that has been adopted by two new projects, Grin and Beam. Litecoin is also considering this technology.
MimbleWimble is a complete design of the Bitcoin blockchain structure. The protocol enables blockchain privacy by hiding transaction amounts and information from senders and receivers. Importantly, it implements these features in a scalable way. The blockchain based on MimbleWimble has the same throughput as Bitcoin's current capacity, while completely confusing the data.
Unfortunately, due to fundamental differences in design, developers cannot simply add MimbleWimble to the current bitcoin blockchain. They either give up Bitcoin's current design, including its scripting capabilities, or use an auxiliary method such as an extension block to benefit from MimbleWimble's strengths. Or like CT, MimbleWimble can be sidechained and tied to the Bitcoin blockchain, which allows users to trade with complete privacy, and they can switch to the Bitcoin main network at any time.
No matter how many privacy mechanisms are deployed at the blockchain level, nodes are still easily identifiable if there are no other precautions. Bystanders and perpetrators can easily identify IP addresses, geographic locations, and other metadata.
Dandelion is a new way to achieve network privacy. Currently, Bitcoin transactions are spread in a similar way to floods. This means that the node will randomly pass transactions to other nodes it is connected to. Therefore, other parties can obtain useful and identifiable data through triangulation.
However, in Dandelion, a node only sends data to another node it randomly selects. The node that received the data performs the same operation. This process is repeated several times until after a period of time, the node sends the information completely to the entire network. This method of propagation makes it almost impossible for a third party to decipher valuable information about the original node.
Since its release in 2017, Dandelion has undergone several upgrades and may become part of Bitcoin sometime this year.
While privacy at the blockchain level is still a major requirement for Bitcoin, users will benefit from greater interchangeability and privacy from layer-2 protocols such as Lightning Networks.
The lightning network uses the onion routing system Sphinx to prevent nodes from simultaneously obtaining information from senders and receivers. When the payment route passes through the payment channel, the node can recognize it. However, the node does not recognize the source or destination of a channel. In the channel, the node can only see its previous hop and the next hop, but does not know how long the channel is.
In addition, third parties cannot connect packets that pass through the same channel. Compared to other onion routing systems such as Tor, Sphinx has the advantage that no "exit nodes" are needed, and such nodes can be used to collect data.
Therefore, privacy-conscious Bitcoin users use Lightning Network to pay much better than chain transactions.
Middle layer confusion
Bitcoin Core developers and the Bitcoin research community have been working on several proposals to blur the lines between different types of transactions and smart contracts. Identifying chain transactions from under-chain transactions, this form will no longer be viable after the following upgrades.
Currently, Bitcoin uses the ECDSA signature scheme to create digital signatures. One of the problems is that ECDSA requires each user in a multi-signature transaction to disclose their public key. The Schnorr signature is another option that allows signature aggregation, so all participants are not required to expose their respective public keys. Therefore, regardless of how multiple signatures are arranged, the identity of each participant will be protected.
MAST (Merkelized Abstract Syntax Trees) is a way to reintroduce more smart contracts into Bitcoin by significantly reducing the amount of data occupied by Bitcoin. More importantly, however, it has brought an important breakthrough in privacy.
The increased efficiency brought by MAST means that only the executed smart contracts will be made public, thus reducing the amount of information that needs to be disclosed. In short, this will help to some extent prevent the ability to break transactions on the chain from under-chain transactions. However, the program did not reach the perfect state.
Taproot & Graftroot
Taproot and its upgraded Graftroot make up for MAST's lack of privacy.
These upgrades allow normal and multi-signature transactions to look exactly the same on the blockchain. All in all, with the development of Lightning Networks, the impact of these improvements will grow, as all bitcoin transactions, regardless of the network or hierarchy they operate on, will look exactly the same.
The full privacy of Bitcoin – a long way to go
Privacy and interchangeability have long been a goal of the Bitcoin community, but the agreement has a long way to go. While the network layer and the layer-2 protocol are making great strides in privacy, the privacy of the underlying blockchain has a long way to go.
In order for Bitcoin to become a sound currency and a global reserve asset, developers will need to find a more comprehensive BIP to ensure stable interchangeability of Bitcoin at the blockchain level. Prior to this, all other upgrades were useful, but they did not meet the ultimate goal.