The advent of bitcoin was the beginning of numerous technological improvements and innovations based on the already working system, which cipherpunks enthusiastically began to expand and modify. However, it is also important that although bitcoin was primarily declared as an electronic money system that allows electronic transactions between participants directly, the white paper also focused on the privacy of users.
"The traditional banking model maintains the necessary level of confidentiality by providing access to information only to party parties and a trusted third party. The need to publish transactions openly precludes this approach, but privacy can still be maintained if the public keys are anonymous. It will be public information that someone sent someone some money, but without being tied to specific individuals. The same amount of data is disclosed on stock exchanges, which publish the time and volume of private transactions, without specifying between whom they were committed," says Satoshi Nakamoto.
The myth of bitcoin anonymity
In the ten years since the advent of bitcoin, the industry has made tremendous progress from an infrastructure point of view, but the privacy of users is still being given undeservedly little attention. This often happens quite consciously, as in the case of large service providers, who actually kill the very concept of money without intermediaries.
It should also be noted that many users of cryptocurrency from the beginning for some reason were convinced that the system gives them complete anonymity. This myth, although still actively supported by mainstream media, has been debunked for a long time, and it is no secret that law enforcement agencies can quite successfully deanonymize transaction participants.
Not only are specialized software vendors, such as Chainalysis or Elliptic, helping them, but they are often the usual blockchain browsers where information about each transaction is recorded and publicly available. Therefore, one of the best recommendations for users who care about their privacy is to never reuse the same address.
This, for example, was mentioned in his white paper and by Satoshi Nakamoto:
"An additional protection would be to generate a new "open/closed key" pair for each transaction: this would prevent different payments from being linked to their common sender or recipient. Some public binding can not be avoided: transactions with multiple inputs prove that these amounts belong to the same person. The risk is that disclosing the identity of the key owner may result in the disclosure of all transactions."
Important innovations
In the case of bitcoin, a number of technical improvements have been implemented over the past few years aimed at a higher level of privacy for users.
Among them, first of all, should be highlighted technologies of so-called mixing - JoinMarket, CoinShuffle, TumbleBit and others. One of the most significant achievements in this direction can be considered the release of Wasabi Wallet in 2018, which is based on the interchangeability (fungibility) of bitcoin, that is, the same value of all coins, regardless of their previous Use. CoinJoin's mixing makes them the same and thus ensures the anonymity of transactions.
Confidential Transactions is another noteworthy and active technology. First announced in 2015 by Adam Beck, it uses the so-called "Pederson's obligations" and allows the transferable amount visible only to the direct participants of the transaction or their assigned third party.
However, such transactions are not in themselves a universal solution, as they hide only the amount of the transfer, not the address of the sender and recipient.
A new approach to the solution of the issue was proposed by the developer of Bitcoin Core Gregory Maxwell. Its model involves using the CoinJoin method to combine transaction exits into one large transaction, which will hide communication between users from third-party observers.
Also among the noteworthy improvements of bitcoin is Schnorr's signatures, designed to replace the signatures used today by ECDSA (Elliptic Curve Digital Signature Algorithm). The main difference is that Schnorr's signatures allow you to sign all transaction data at the same time, while ECDSA requires you to sign each piece of data separately. In addition to scaling the network (the size of the blockchain data is reduced by about 25%), the technology increases the privacy of users, making it difficult to track the origin of transactions.
Confidential Transactions is another noteworthy and active technology. First announced in 2015 by Adam Beck, it uses the so-called "Pederson's obligations" and allows the transferable amount visible only to the direct participants of the transaction or their assigned third party.
However, such transactions are not in themselves a universal solution, as they hide only the amount of the transfer, not the address of the sender and recipient.
A new approach to the solution of the issue was proposed by the developer of Bitcoin Core Gregory Maxwell. Its model involves using the CoinJoin method to combine transaction exits into one large transaction, which will hide communication between users from third-party observers.
Also among the noteworthy improvements of bitcoin is Schnorr's signatures, designed to replace the signatures used today by ECDSA (Elliptic Curve Digital Signature Algorithm). The main difference is that Schnorr's signatures allow you to sign all transaction data at the same time, while ECDSA requires you to sign each piece of data separately. In addition to scaling the network (the size of the blockchain data is reduced by about 25%), the technology increases the privacy of users, making it difficult to track the origin of transactions.
In addition, the mathematical properties of Schnorr's signatures will contribute to the development of smart contract-style solutions such as scriptless scripts, Taproot and Graftroot. It is noteworthy that these solutions will be displayed in the blockchain as ordinary bitcoin transactions. This will allow for the creation, for example, of futures markets, decentralized exchanges or insurance contracts, where only ordinary-looking transactions will be visible.
Finally, lightning Network is a technical solution actively being developed as a protocol for the second layer of blockchain networks. Deployed on top of bitcoin, LN uses smart contracts to achieve higher transaction bandwidth, while maintaining the peer-to-peer nature of the bitcoin protocol.
However, the main feature of LN is that transactions are carried out offline, that is, not recorded in publicly available blockchain. Thus, once the funds are sent to the payment channels, users can make transactions in a completely anonymous manner.
By the way, the head of Twitter and Square Jack Dorsey has already stated that he considers it only a matter of time to integrate Lightning Network into the Cash App - one of the most popular applications in the U.S., allowing the purchase of bitcoin. At the same time, he called cryptocurrency itself - quite in the spirit of cipherpunk - the future native currency of the Internet.
Anonymous cryptocurrencies
The most well-known among the so-called anonymous cryptocurrencies are Monero, Dash and zcash. All of them are payment systems with their own internal settlement unit, focused on ensuring the complete privacy of financial transactions through cryptographic protocols, which significantly complicate or make it is not possible to audit the network's data.
One of the creators of zcash, for example, is Suko Wilcox, a former developer of the aforementioned DigiCash David Chowm. This cryptocurrency uses the implementation of the zero-knowledge proof protocol (proof with zero disclosure) called zk-SNARKs, which, by the way, in the near future plans to implement the Tron project. The same option, according to Vitalik Buterin, can be implemented in Ethereum.
In addition, in 2019, the MimbleWimble-based Grin and Beam cryptocurrencies appeared - slightly different in form and implementation, they offer essentially a common solution to protect the privacy of users.