Bitcoin Privacy: "Confidential Transactions" Feature Can Fix Some of …

Andrew
Poelstra

is a mathematician at
Blockstream

and was recently part of a panel discussion on improvements for
Bitcoin at the
2016 MIT
Bitcoin Expo

. During the panel, Poelstra discussed
Confidential Transactions

, which is a privacy-enhancing feature he has been working on with
Blockstream co-founders and
Bitcoin Core

contributors
Greg
Maxwell

and
Pieter
Wuille

.

One of the main reasons Blockstream is working on Confidential
Transactions is to preserve the censorship-resistant properties of
Bitcoin and other blockchains.

Scalability Is Not the Only Problem with Bitcoin

Although

scalability

solutions have been a major area of contention lately, Poelstra
understands this is not the only real problem. During his recent
appearance at the MIT Bitcoin Expo, Poelstra pointed out the issues
related to the public nature of Bitcoin transactions:

“Lately, we’ve been talking about scaling and centralization,
but that’s not the only problem with Bitcoin. This one may be a bit
attractable, which is that all transactions are public and all of
the information in all the transactions are public. This allows a
lot of analysis to happen . . . [People] can infer a lot about
transactions just from the amounts and also the shape of the
transactions.”

Indeed, there are a number of different startups working to
deanonymize the Bitcoin blockchain every day. In the past,
Stash

co-founder and
Open
Transactions

creator
Chris
Odom

has
stated

these companies could go out of business as more privacy-enhancing
features are enabled on the blockchain.

Centralization of Mining Threatens Censorship
Resistance

At the core of Bitcoin’s value proposition is censorship
resistance. Bitcoin has value because it can be used to complete
transactions that are likely to be censored on other payment
networks. Andrew Poelstra is committed to preserving this aspect of
the technology.

The centralization of mining is one of the current weak points
in Bitcoin due to the attack vector opened up when the people who
are processing transactions can possibly identify transactions they
or regulators don’t like. Poelstra hit on this point during the
panel discussion at the MIT Bitcoin Expo:

“One reason we’re worried about the centralization of mining is
that miners are, sort of, gatekeepers to what transactions can go
in the blockchain and what can’t.”

This desire to weaken the negative effects of Bitcoin mining
centralization is what pushes Poelstra and others to work on
Confidential Transactions. With Confidential Transactions, privacy
is improved by cryptographically masking the amounts associated
with Bitcoin transactions. When this privacy-enhancing feature is
used, onlookers are unlikely to be able to figure out which
addresses are
change
addresses

, which means it’s difficult to tell which Bitcoin address is
receiving a payment.

Confidential Transactions Can Help


CoinJoin

, originally proposed by Greg Maxwell, has been around since 2013,
but there are still some major issues with the privacy-focused
tool. Poelstra mentioned how Confidential Transactions can improve
CoinJoin during the panel discussion:

“It’s very difficult to do a CoinJoin in a way that improves
privacy, and it’s also very difficult to measure how much privacy
we get. By hiding amounts, we allow combining transactions in a way
that we no longer have this clear correlation. [With Confidential
Transactions], I have a couple of outputs, Mark has a couple of
outputs, and nobody can see the amounts. When we put them together,
now it’s just a pile of outputs with no one else associated.”

Keeping scalability in mind, Blockstream has been focused on
making Confidential Transactions as efficient as possible. When
Confidential Transactions is combined with CoinJoin, it becomes
much more difficult to censor transactions as a miner because there
is more difficulty associated with identifying the individuals
behind specific transactions.

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