Bitcoin Transactions Can Become Completely Untraceable With Upcoming New Tech

Unlike common belief, Bitcoin is not very anonymous. Very few people actually know that Bitcoin is not a privacy-optimized coin. However, the notion that Bitcoin is not really anonymous may soon become a thing of the past.

To be clear, Bitcoin, as it currently exists, can be used anonymously when using Tor, an anonymous browser, or by using other new privacy technologies that are already live as discussed below.

What little people know is that by using a non-privacy optimized client, an ‘attacker’ can relatively easily trace back a transaction to its original node and determine the node’s IP address. The IP can then be used de-anonymize a Bitcoin address.

There are already a few Bitcoin clients that leverage some of the technologies outlined below. Here are a few trusted privacy-focused wallets:

Samourai wallet

Wasabi wallet (formerly Hidden Wallet)

Breeze wallet (by Stratis)

Making Bitcoin more private and anonymous

There is a lot of technological innovation going on that should make Bitcoin very private and anonymous.

Bitcoin users should be able to spend their money without worrying about “spies” who can analyze the public blockchain and use the IP addresses to construct user identities.

For many years now, privacy has been a lacking feature of Bitcoin. However, thanks to several privacy-enhancing technologies like TumbleBit, Schnorr signatures, STONEWALL, and Dandelion among others, Bitcoin’s stature as a privacy coin is set to change.

By 2019, Bitcoin transactions could be as private as any of the purely privacy-focused coins such as Monero (XMR), Dash (DASH), and ZCash (ZEC).

TumbleBit – unlinkable payment hub

TumbleBit, described as “An Untrusted Bitcoin-Compatible Anonymous Payment Hub”, is one of the most anticipated bitcoin privacy projects, having been in development for almost two years.

As per the official Github:

“[…] TumbleBit helps users to send money from one address to another address, while breaking the link between them. Even the Tumbler is not capable of guessing it. Also the Tumbler has no way to cheat and steal money from its users. This tremendously increases the fungibility of Bitcoin.

It is basically a coin-mixing protocol that creates off-chain payment channels. It uses a tumbler that cryptographically mixes coins between participants in a payment channel.

The beauty of this project is that it completely breaks the trail of transactions, making it really difficult to link users and transactions.

The tech was first proposed by a group of academicians in 2016 before Adam Ficsor implemented it in the crypto Stratis’ Breeze wallet. The technology is already in use thanks to Breeze wallet.

If you want to learn more about this technology watch the video below or read this summary or the full whitepaper (technical reading).

CoinJoin and ZeroLink – pooling transactions

CoinJoin is another project that seeks to make it harder for snoopers to identify senders and receivers in a bitcoin transaction.

CoinJoin combines transactions making it difficult to tell where the coins came from. CoinJoin is an on-chain technology.

First proposed in 2013 by Gregory Maxwell, an important Bitcoin Core contributor, CoinJoin as the name suggests, combines several transactions to form one big transaction.

The technology also employs a trick called “Chaumian CoinJoin” which cryptographically scrambles sending addresses and receiving addresses into blinded addresses. Addresses are then matched using the ZeroLink framework.

The Chaumian CoinJoin technology is already in use in privacy-focused Wasabi Wallet. Samourai Wallet also recently announced use ZeroLink in a mobile wallet called Whirlpool.

Schnorr Signatures – multisig privacy

Schnorr signatures have earned praise from most cryptographers in the cryptocurrency industry. Their use brings one massive advantage to Bitcoin privacy transactions.

Schnorr Signatures allow the use of multisig transactions to be anonymous and indistinguishable from a traditional single key transaction.

Schnorr signatures have also inspired a whole new class of solutions like “scriptless scripts”, “Graftroot” and “Taproot”.

Since they will resemble normal bitcoin transactions, they could be used in the futures markets and decentralized exchanges without attracting suspicion from would-be blockchain spies.

Dandelion – node communication protocol

Dandelion is a bitcoin privacy solution that seeks to make it practically impossible for spies on the blockchain to pinpoint a transaction’s origin. The protocol changes how nodes in a peer-to-peer network approach transaction broadcasting and processing.

Dandelion occurs over two (2) phases:

Anonymity phase (stem phase)

Spreading phase (fluff phase)

Essentially, during phase one, a node would push transactions from one node to another before being diffused to the entire network. Using the Dandelion protocol allows only one node to receive the new transaction.

Currently, transactions are diffused immediately throughout the network, making it possible to trace the original node and therefore, an IP address.

The whitepaper was published by Shaileshh Bojja Venkatakrishnan, Giulia Fanti, and Pramod Viswanath, amongst others, in January 2017. It is expected that Dandelion will be ready for implementation in the next Bitcoin Core release or if not, somewhere in 2019.

Other Bitcoin privacy solutions

The number of bitcoin privacy projects in development or being implemented at the moment keeps growing every other day. Many of these projects are old proposals that have been under consideration for a while now.

Some of the solutions to look out for include BIP151 encryption, which will let all nodes encrypt all blockchain traffic, including transactions.

Another option is the use of a solution called Liquid and Confidential Transactions (CT). It combines sidechains capability with transaction blinding that obfuscates amounts sent or received in a transaction.