Bitcoin’s privacy problem and what Cypherpunks are doing to fix it

As the US government ramps up its efforts to regulate crypto, it is targeting privacy projects like never before. The crypto community is worried, especially cypherpunks, and users are currently grappling with the implications of the Tornado Cash ban and how it can be applied in practice.

But behind the scenes Bitcoin developers have been working for years to maintain privacy when transacting with crypto.

“Targeting an open source protocol (as opposed to a person) is clearly an escalation in the attempt to get cryptocurrencies to ‘fit’ into what the United States considers its control framework. financial”, Craig Raw, developer of Bitcoin Sparrow wallet, said Decrypt. “This is where the importance of holding funds without KYC become apparent and the fight for financial privacy escalates again,” he said.

Bitcoin has long been considered private, but that is not correct. At first, many Bitcoin users knew nothing better and transacted with the cryptocurrency online without thinking about the consequences, including on illicit darknet markets.

These days, authorities can quite easily match Bitcoin transactions to real people because exit ramps like cryptocurrency exchanges collect personally identifiable information about their customers. In fact, law enforcement even said they prefer it when criminals use the asset because it is so easily traceable. Bitcoin can be pseudonymous – no one’s identity is recorded on the block chain– but every transaction is.

“We already put a large part of our lives online, and this trend will undoubtedly continue,” said Bitcoin Design contributor Christoph Ono. Decrypt. “After decades of the internet, it’s also clear that the urge to collect/analyze/hack/sell data is too strong for many private companies, governments and other groups.”

He added that “the data is being used against us” and that the added layer of financial data on public infrastructure could make things “much worse”.

This is why developers are currently building tools that will make transactions on the Bitcoin blockchain almost untraceable. Here’s what they’re working on.


One way to make Bitcoin more private is to use some wallets. Specifically wallets that use CoinJoin, a technology that aggregates Bitcoin transactions to hide their origins. There are currently several projects using mixing protocols to promise more privacy and near-anonymous transactions. CoinJoin is one of them.

Feds have an eye on mixing protocols: This week, the Treasury Department banned Tornado Cash, a coin mixing app that allows users to send Ethereum anonymously in an unprecedented move.

US citizens are no longer allowed to use the tool or interact with addresses that use it. Crypto developers and users are currently struggling with the implications of this prohibition and how it can be taxed in practice. But for now, the development of similar tools used for Bitcoin transactions continues. “Time will tell where the outcome of this fight lies, but at the end of the day, there is no middle ground,” said Sparrow Wallet’s Raw. who can get privacy, or we have no privacy at all.”

Wasabi Wallet is a project that uses the Tor network to encrypt communications. Tor is software that allows users to anonymize their Internet traffic by sending it through a network of servers operated by volunteers. Wasabi, a desktop wallet, connects users to random bitcoin peer-to-peer nodes, hiding transactions so it’s very hard to tell where the money is going. In June, he released his latest wallet, Wasabi 2.0.

His team said Decrypt that its latest version was the best option for privacy, as it will make “default privacy for everyone” with fast and cheap UX. “What makes it different [from other wallets] is the user experience,” said Adam Fiscor, co-founder of zkSNACKs, the software company behind Wasabi Wallet. He added that privacy should be “frictionless and effortless” and that Wasabi does; even a non-Bitcoiner could get a feel for using it.

Why would anyone want to use Wasabi? “Good user experiences with privacy products are needed as we move towards a world where everything is online,” Fiscor said.

Rafe, a longtime Wasabi contributor, said Decrypt that Wasabi uses a new CoinJoin mechanism that hides more transactions than before, meaning more people can take advantage of the app’s privacy feature.

Craig Raw said his Sparrow wallet could make Bitcoin almost as private as Monerowhich is the largest privacy coin, with a market capitalization of $2.8 billion, and currently the go-to option for privacy.

Monero uses ring signatures – cryptographic digital signatures that cannot be identified – making it very difficult to trace transactions.

Bitcoin transactions can be traced because everything is stored on a public block chain. But Raw says Sparrow can achieve a similar level of privacy, if a user chooses. “It is possible, with care, to achieve a level of privacy similar to Monero,” he said. Decrypt. “In practice, the answer is to ask ‘what is the extent of my anonymity’ with every transaction you make.

“Using Sparrow’s tools, it is possible to make this large enough that the probabilities of ownership of the funds are low enough to make this effectively impossible.”

The Lightning Network

A perhaps lesser-known way to stay private while using Bitcoin is through the Lightning Network. A “second layer solution”, it was created to solve Bitcoin’s scalability problem or, in other words, allow more transactions to be processed. It does this by bypassing Bitcoin’s main blockchain.

But it also has privacy benefits, as each transaction is not permanently stored on the main blockchain. Instead, various transactions are grouped together and then recorded later as one large transaction. It’s not only useful for microtransactions (like buy a coffee in El Salvador) but keeping the payments anonymous.

Evan Kaloudis, the developer behind Zeus, a non-custodial Lightning wallet, said Decrypt that using Lightning, it’s “virtually impossible” to track who paid for what.

“Today, Lightning offers great privacy to senders,” he said. “Your employer shouldn’t be able to see where you’re spending your salary. The convenience store where you make a small purchase should not be able to see how much money you have or where you are shopping.

But there are still privacy issues on Bitcoin’s network, Rafe added, and it’s in our interest to resolve them. Why? Because government surveillance could increase with digital money, like central bank digital currencies (CBDC)—centralized digital versions of fiat currency (i.e. US dollars). CBDCs could, in theory, be used by large entities to monitor what we do.

Governments around the world are at different stages of building or researching such assets, with a number of Caribbean countries having already released one. But perhaps the biggest concern for the crypto community – or anyone concerned about privacy – is a CBDC that is used by an authoritarian regime, like Chinato monitor people’s daily lives.

“What is scary is that governments are also increasing oversight of traditional finance with CO2 points on credit cards, money removal, CBDCs and social credit scores,” Rafe said. “I don’t think they will allow monetary competition or a different system with different rules and different freedoms.”

“If we want an alternative, we better build it fast,” he said.

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