When you think of privacy coins, Monero or Verge might first come to mind. But bitcoin’s design is actually for a privacy coin, and even though its transactional data is publicly available, users can go a few extra steps to hide their info. Other cryptos like Monero and Zcash offer heightened privacy features that keep user identities and most transactional information completely hidden if you want. Now, with the Mimblewimble protocol, complete privacy may become the standard, with increased scalability as an added bonus. Will it be the end of bitcoin?
Is bitcoin a privacy coin?
The inherent design of bitcoin was as a privacy coin. But the transparency of some of its data has excluded it from being completely private. For a BTC transaction to work, it must be chained to the rest of the transactions in a public record that’s immutable. While your name is not public, the wallet address and the transaction data are.
Why is this a problem? Say, for example, you make a purchase using bitcoin. The 3rd party payment processor that you used to take your payment and the company where you made the purchase now have your wallet number, your name, probably your email, and possibly even a shipping address. Conceivably, they could now begin to track your other transactions.
How to increase privacy in bitcoin transactions
It’s not just money launderers who want to maintain privacy, although that is how people who try to hide their identities are often portrayed. People of all walks of life may prefer that their personal and financial data be untrackable. Most don’t want other people watching over, or even worse, using their financial data for personal gain. Many of these people feel that financial privacy is a right that we should all have.
Bitcoin users can increase the level of privacy:
- BTC traders can use a peer-to-peer 3rd party service that puts you in contact with other buyers for private bitcoin transactions. Reviews of these services vary widely and people are very much acting “at their own risk” when using them.
- Another way users try to increase privacy with bitcoin is to use a mixing service. These bitcoin mixers, or tumblers, essentially break the link between one wallet address and another by delaying and then combining your coin with others. Again, it’s a 3rd party service and outsiders often associate their use with money laundering. However, others simply use them to maintain confidentiality.
- Some people set up a logless VPN, or virtual private network, to make their transactions more anonymous. A VPN doesn’t keep a history of your online activities and it encrypts and reroutes your internet traffic through many different servers. As with the other options, you are relying on a 3rd party VPN provider. As a side note, VPN use may be restricted in some countries (i.e. China and Russia) but otherwise, they are perfectly legal. Even the IRS thinks VPNs are a great tool for accountants who want to secure their client data.
- Bitcoin traders that use a hardware wallet like the Ledger Nano-S have the ability to create a new address for receiving bitcoin for every transaction.
Securing the Bitcoin Network
Obviously, the above choices for increasing financial privacy may not be optimal for all people. In all three cases, you must rely on a 3rd party to enable increased anonymity. But developers have continually worked to address the issue of confidentiality on the Bitcoin Network. One such solution was via confidential transactions. These allow users to encrypt the bitcoin amount by using blinding factors.
“A Blinding factor is a random value used to encrypt bitcoin amounts in a transaction and is chosen by the sender of a transaction. The selected blinding factor should suitably encrypt the amount being transacted, but should, however, not affect the input and output of a transaction.”
Other developments are in the works for making bitcoin more secure. One example is an off chain mixer, Tumblebit, which improves upon previous tumbling services.
Privacy coins emerged to improve confidentiality
Since the arrival of bitcoin, other cryptocurrencies have tried to take its privacy to another level. Monero, for instance, has several cryptographic features in addition to ring confidential (RingCT) transactions (RingCT), including:
- Stealth Addresses eliminate the possibility of any association between a transaction’s output and the receiving wallet address. In this way, they hide the transaction’s destination wallet address and the receiver’s identity.
- Ring Signatures are basically digital signatures which are created by a member of a group, all of whom have their own keys. No one knows which person in the group created that signature. Monero traders are creating a new wallet address for every single transaction in this random process.
Other privacy coins that are now being actively traded include Zcash, PIVX, and Dash, although there’s been some controversy around whether Dash is a privacy coin.
Privacy coins vary as to the utilization of privacy features. For instance, Zcash users can opt for their transaction to be invisible. On the other hand, with Monero, privacy transactions are the default. Both projects, in additiona to bitcoin, have a dedicated team of developers working on improvements to privacy, scalability, etc.
Mimblewimble brings new options for privacy coins
Where did Mimblewimble come from? An anonymous entity, obviously well versed in Harry Potter lore, wrote the Mimblewimble white paper. The term “Mimblewimble” came from a tongue-tying spell that Dark Arts teacher Gilderoy Lockhart used and taught to his students. The spell made it impossible for the other witches and wizards to accurately cast their next spell, making it handy in duels.
“I call my creation Mimblewimble because it is used to prevent the blockchain from talking about all user’s information”– Anonymous creator of Mimblewimble protocol
For blockchains, Mimblewimble makes transactions untraceable. Essentially, it disables those foes who want to access and track your data. With Mimblewimble, these bad actors find it impossible to accurately surveil their prospects.
Mimblewimble’s prime innovations
As a privacy protocol, Mimblewimble proposes two major areas of improvement over bitcoin, augmented privacy and scalability.
Mimblewimble’s Privacy and Scalability Innovations
- The protocol uses the CoinJoin method (which also goes well with bitcoin). CoinJoin allows multiple people to combine their coins while doing their separate transactions. Even the recipients don’t know what addresses sent them their crypto.
- Mimblewimble uses a form of Confidential Transactions, as described above.
- Another privacy tactic that Mimblewimble utilizes is Dandelion. In a nutshell, Dandelion acts like the actual Dandelion flower, broadcasting its seed all over the place, but only after it has flown about for a good period of time. But in a blockchain, it is the transactional data that spreads by making hops and only broadcasting to the blockchain after a specific time/distance. This helps solve the problem caused when an entity is tracking transactions via multiple nodes that exist for the express purpose of triangulating data and finding out private blockchain data.
The other major improvement involves scalability. Within a blockchain that uses the Mimblewimble privacy protocol, the blockchain is tied (and some would say limited) to the number of people using that network. This is in contrast to bitcoin, which corresponds to the number of wallet addresses.
“Simply put, because there are no amounts as the sum of the inputs and outputs is zero, and because users don’t need to sign any transaction with their private keys, there is no need for actual addresses.” – Pedro Febrero
Does Mimblewimble spell the end of bitcoin?
The Mimblewimble white paper expressly states that to use the protocol to improve Bitcoin, the bitcoin script would have to be removed.
But, it also goes on to say that bitcoin could use Mimblewimble as a sidechain (or soft fork). Projects including bitcoin and Grin (which went live Jan. 15, 2019) are already implementing this technology. In this way, users on other blockchains can trade with the heightened privacy developed by the creator of Mimblewimble.
Also published on Medium.