In an era where data is the new gold or oil, and big tech is thirsting over every piece of metadata they can pry from your fingers, privacy is a fast-eroding commodity. While many are not too concerned with the privacy of their social media posts, search engine queries, emails or cloud-stored documents and files.
When it comes to money, the vast majority of people do not take on that lackadaisical stance to their net worth.
Bitcoin, the trailblazing decentralized digital currency, holds a unique position as the first mover, the most well-dispersed, decentralised and secure network. Touted as the next form of base money for the world, Bitcoin offers a degree of financial freedom and anonymity unavailable in traditional financial systems. However, as appealing as this sounds, the bitter truth is that Bitcoin’s privacy protections aren’t perfect.
While it has come a long way since its inception in 2009, the nature of its public ledger and certain structural nuances inadvertently leave room for user de-anonymization and traceability. Coupled with the fact that many users are funnelled into KYC factory farms to acquire Bitcoin, it makes it far harder to maintain your privacy than in years gone by.
This imperfect approach to financial anonymity is an issue that resonates deeply with Bitcoin users who cherish their financial privacy. Hence, the burgeoning field of privacy-enhancing technologies built on the Bitcoin network is a critical evolution, one that could fortify Bitcoin’s privacy protections and shape the future of this pioneering digital currency.
Bitcoin’s privacy has its limitations, which is why Monero users still hold on to a sliver of a use case and market cap, but there are several options to assist users in breaking chain analysis assumptions, provide forward privacy and incentivise anonymity.
Privacy technology built on Bitcoin is not just important but an essential part of its evolution to maintain fungibility and equality as important as the safety of Bitcoin users.
What privacy options do I have as a Bitcoiner?
When it comes to Bitcoin privacy, it’s important to understand that there isn’t a one-size-fits-all solution. Each available option has its own set of trade-offs, and the best choice for you depends on your individual needs and circumstances. Some privacy measures might be fast and convenient but could come with higher costs or require a certain level of risk tolerance.
For example, CoinJoin offers relatively high privacy but comes with a higher transaction cost and potential trust issues with other participants. Others might be more affordable but could take more time to implement or require a higher level of technical expertise.
Layer-2 solutions like the Liquid Network and Lightning Network provide speed and lower costs but have more complex setup requirements and potential liquidity issues. Ultimately, navigating Bitcoin privacy involves a careful balancing act between speed, cost, time, risk tolerance, and complexity.
So the more tools you have in your arsenal, the better decisions you can make; currently, your options for adding privacy layers to your Bitcoin transactions include:
- Confidential Transactions
- PayJoin
- CoinJoin
- CoinSwap
- Steal Addresses
- Whisper Addresses
- PayNym
- eCash mints
Now there is a new proposal making the rounds known as Darkpools.
What are Darkpools?
Darkpool is a privacy-preserving cooperative self-custody pool on the Bitcoin base chain that utilities a pay-to-taproot n-of-n musig on the key path along with covenants CTV (OP_CHECKTEMPLATEVERIFY) settlement tree on the script path. The current proof of concept implementation of the Darkpool project is known as Tarpit.
Imagine a pool of Bitcoin funds like a tree, with the whole pool being the root of the tree and the individual portions of the funds being the leaves.
In this pool, the whole amount of Bitcoin (the root) is secured by a system that needs all members of the pool (n-of-n) to agree before the funds can be moved. But there’s a backup plan – a complex script that, when triggered, gradually pushes individual portions of the pool (the leaves, or vTXOs like those used in Ark) into the blockchain.
Each leaf, or smaller portion of the Bitcoin pool, also has its own security measures. They require a smaller number of members to move (m-of-m), but also contain an additional security measure in the form of a 2-of-2 musig. In this case, the musig includes the pool operator and a specific key (Xi).
As an option, a pool participant could reveal their private key to the pool operator and in return get immediately spendable e-cash. However, this option comes with a timer, like a time bomb ticking away. If the pool operator doesn’t cooperate with a musig spend before the timer runs out, then only the individual with the private key can spend it.
This setup has an inherent risk for pool operators who provide immediate withdrawal. They take on the risk for a period of time where they’ve been given the private key, but can’t move the funds because of the time lock. During this time lock period, if anything happens, the pool operator stands to lose.
What are the properties of darkpool?
Darkpools retain the following properties:
- Economic: Single on-chain UTXO, fee for state transitions is shared by all participants, small on-chain footprint.
- Private:Â Fungible denominations and blind signatures provide eCash-like privacy.
- Byzantine proof:Â Preserves property rights with no offline risk; clients can’t advance an invalid state.
- Interactive:Â All participants have to be periodically online to sign a state transition via n-of-n schnorr Musig.
- Sovereign: All participants can initiate and drive forward withdrawal, an on-chain partial or final settlement.
- Standalone recovery: Even in case of a disastrous crash and loss of state backups unaided recovery is possible.
- Robust:Â The full CTV settlement tree is deterministically generated from the current vTXO set.
What if my node crashes?
Users that experience a node crash may rejoin by receiving the following information from a fellow user or the coordinator:
- Pool Template (should have a backup)
- Anchor UTXO (SPV proof may be provided to light clients)
- Round number (increments with every mix round)
- Keyset (X1..Xn)
What if I need to recover my Darkpool funds?
If you’re a user of Darkpool, you can retrieve your keys – these are kind of like your password to access your Bitcoin – from something called a ‘seed phrase’ and a ‘Pool Template Backup’. This is a bit like having a master key or a backup password in case you lose the original. This recovery process is helped by a special feature in the system, which adds a coded message with important information (a pool_id and round) onto each Bitcoin transaction.
These keys are created following a specific pattern that changes with each ’round’ of transactions. If you’re in ‘Standalone Recovery mode’, meaning you’re trying to recover your funds on your own, you would look through the transaction history (or use a service that does this for you) to find the special coded messages that are relevant to you.
Once you’ve found this, you can use the information to work out what your ‘leaves’ are. This is a technical term referring to certain points in the transaction history. You can then use these ‘leaves’ to access your funds in two ways:
- Use both your individual key (Xi) and the pool key (P) together. This is like a two-factor authentication process.
- Wait for a certain period of time (default is 24 hours), and then use your individual key (Xi). This can be helpful in case of recovery.
What can you do with Darkpools?
With Bitcoin Darkpools, you gain a flexible and versatile platform to manage your Bitcoin transactions off-chain. When running a Darkpool node and wallet that is funded with a vTXO you’ll be able to execute private payments to other pool members, preserving your financial confidentiality.
Additionally, you can direct your funds back to an on-chain address, offering flexibility in managing your assets to keep your on-chain footprint smaller, consolidate your on-chain UTXOs or when you need to pay an on-chain address.
The Darkpool also enables the creation of both active and non-interactive Lightning channels, which facilitate rapid, low-cost transactions between participants and better deployment of liquidity when it’s needed.
Lastly, you also have the capability to cover on-chain transaction fees, providing a comprehensive solution for your Bitcoin transaction cost issues in times of block space limits and fee spikes.
Do your own research.
If you want to learn more about Darkpools on Bitcoin, use this article as a jumping-off point and don’t trust what we say as the final say. Take the time to research other sources, and you can start by checking out the resources below.
Are you a Bitcoin and privacy fan?
Have you been using Bitcoin privately to mask your on-chain footprint? What is your preferred method of masking your transactions? Which app is your favourite? Have you tried all the forms of privacy payments? Which one do you prefer? Do you have any tips for keeping chain analysis in the dark?
Let us know in the comments down below.
