Tech

The Future of Privacy in Bitcoin

Ahh, the early days of Bitcoin… Back when everyone thought they were buying weed on the Silk Road anonymously.

Bitcoin has since become so easy to trace thanks to KYC (Know Your Customer) regulations and blockchain analysis. Today, it would be a DEA agent’s wet dream if every drug cartel used BTC to transact.

For a time, the counterattack was to use BTC mixing services. These services would send your bitcoins to many addresses before reaching the destination, obfuscating the actual transfer of value.

Mixing is kinda old school now. Thanks to SegWit (a change added to Bitcoin within the last few years) you can now send multiple payments in a single transaction. This is called coinjoin and it makes it really hard to tell which wallet sent money to which address.

Basically, you use a wallet that supports coinjoin like Wasabi or Samurai and you submit your coinjoin transaction to be included in the next round along with other anonymous transactions. If the threshold number of transactions is met in time, the coinjoin succeeds. Otherwise it fails and you’ll have to try again later.

Second layer networks built on top of Bitcoin, like The Lightning Network, are already enabling people to send BTC with almost no fees and increased privacy. In another few years we won’t even have to go through extra steps, sending BTC will be private by default.

Transactions on the Lightning Network are separate from the blockchain. Transaction information is not public on this network. The lightning network (LN) is a graph of nodes connected by payment channels. If A and B are nodes in LN, then A can pay B some bitcoin if they are connected via a channel. Even if A does not have a channel open with B, they can still transact as long as there exist some path A->C->B where C is any number of nodes connected together with channels.

When a payment happens on LN, it is sent from one node the next and passed along until it reaches its destination. The beauty of this construction is that any particular node in the path only knows two things about the transaction: which node was before it in the path and which node to send it to next. No single node knows that A sent money to B except for A and B.

There are currently proposals being developed that will allow interoperability between BTC base layer and Lightning payments. As the Lightning network matures, people using BTC for payments (as opposed to stores of value) will be incentivized to move their funds to Lightning Wallets for lower fees, instantly confirmed payments, and enhanced privacy.

In the near future, sending digital money will use LN as a second layer to BTC just as sending digital information uses IP as a layer to TCP.

Long live TCP/IP

Long live BTC/LN

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