Changes to Bitcoin and Ethereum – Is Trouble Brewing?

“Blockchains aren’t scalable.” “It’s a nightmare to compliantly report cryptocurrency taxes.” “The masses will never want to be their own bank.”

When I speak to people who are sceptical on Bitcoin and blockchain technology, these arguments are often used. Whilst I don’t necessarily agree with their viewpoints, I totally get where they’re coming from.

There are times when I try to look at the cryptocurrency space from a sceptic’s position. When I do, however, the above arguments aren’t the ones that bother me. The headwind I continue having trouble addressing is one I rarely see discussed: privacy.

Indeed, be it in relation to Bitcoin or Ethereum, I often wonder why so few seem to talk about the fact both blockchain networks will, in only a matter of years, wield significantly bolstered privacy-preserving properties.

When I tell people this, I’m often met with surprise. Certainly, for those entrenched in the crypto industry, the fact Bitcoin and Ethereum are preparing to up their privacy will come as little shock.

Bitcoin and Privacy: 10 years in the making

In the case of Bitcoin, conversations over its privacy – or lack thereof – started just weeks after Satoshi Nakamoto posted his/her/their seminal Bitcoin whitepaper to a cryptography mailing list in 2008.

“Even in 2009, Satoshi, Hal Finney, and others were talking about the privacy problem in Bitcoin,” recounted veteran cryptographer and Zcash creator Zooko Wilcox in a recent episode of Anthony Pompliano’s ‘Off the Chain’ podcast.

“Satoshi, Hal, and everyone involved for the first several years [of Bitcoin’s development] considered privacy to be not only a necessary goal but almost the overriding purpose of Bitcoin,” Wilcox explained. “They talked, from the beginning, about how to achieve it, about how there was sort of a gaping problem with the original design of Bitcoin and that it exposes people’s transactions to unauthorized others.”

Quick reminder: Bitcoin is not anonymous. Every bitcoin transaction is recorded on a public, online ledger (i.e., the Bitcoin blockchain). Think of this as a database that stores all bitcoin transactions to have ever occurred. If you want to transact with the bitcoin cryptocurrency, you need a Bitcoin address. Because your Bitcoin address is not publicly associated with your real-world identity, it functions as a pseudonym. This is why you’ll often hear Bitcoin described as pseudonymous.

Bitcoin’s Privacy Outlook

When it comes to Bitcoin and its upcoming privacy enhancements, there’s certainly a variety of solutions being worked upon (as can be seen below). Additionally, the Lightning Network layer-two payment protocol continues to grow from strength to strength. What’s more, solutions utilising Bitcoin’s CoinJoin – a method of anonymising bitcoins – are growing in popularity, such as Samourai’s Whirlpool and Wasabi Wallet.

  • Schnorr signatures: an elliptic curve digital signature that emerged as an alternative to the Elliptic Curve Digital Signature Algorithm (ECDSA).
  • Taproot: a cryptographic solution that combines the benefits of Schnorr signatures with Merkelized Abstract Syntax Tree (MAST), a proposed enhancement of Bitcoin’s current script.
  • Graftroot: a proposed opt-in alternative to Taproot that is considered more flexible and scalable.
  • Dandelion: a transaction-routing mechanism that provides formal anonymity guarantees against deanonymisation attacks.
  • Neutrino: an experimental Bitcoin light client protocol that allows non-custodial Lightning wallets to verify bitcoin transactions.

Ethereum to Tackle ‘Privacy Problems’

For Ethereum, upgrades to privacy are being driven by a need for greater applicability and scalability. Being a smart-contract platform that runs atop a publicly auditable blockchain, Ethereum currently struggles to accommodate for a large amount of privacy-reliant use cases such as those relating to commerce, personal identity, and healthcare.

“We need a first step toward more privacy. Currently, there are large privacy problems in the Ethereum ecosystem. The default behavior is to do everything through a single account, which allows all of a user’s activities to be publicly linked to each other. This greatly hinders adoption of many applications.”

Vitalik Buterin (Founder, Ethereum)

Vitalik Buterin
Founder, Ethereum

Ethereum’s Privacy Outlook

Similar to Bitcoin, Ethereum has no shortage of under-development solutions aimed at increasing privacy. Many of these are incorporating a cryptographic method known as zero-knowledge proofs (ZKPs), along with variants like zero-knowledge succinct non-interactive arguments of knowledge (zk-SNARKs).

  • AZTEC Protocol: an efficient, zk-based privacy protocol that enables confidential transactions on Ethereum.
  • Enigma: a decentralised secure computation protocol, where “secret nodes” in the network perform computations over encrypted data.
  • Zeth: a variation of the Zerocash protocol that allows for secure and private payments on Ethereum.
  • Zether: an efficient, fully-decentralised confidential payment mechanism for account-based smart contract platforms like Ethereum.
  • StarkDEX: a decentralised exchange infrastructure that utilises STARKs to batch transactions into a single proof that’s verified on Ethereum.
  • Nightfall: a ZKP-based private transaction protocol for the public Ethereum network.
  • Hopper: a zk-based mixer for mobile-friendly private transfers on Ethereum.
  • Heiswap: a mixer that utilises linkable ring signatures and stealth addresses to enable confidential ‘washing’ of ether.
  • MixEth: a trustless coin-mixing smart contract allowing parties to efficiently tumble coins on Ethereum.

Why I Fear Bitcoin and Ethereum Privacy Upgrades

The fact is, I don’t. I believe the right to privacy is fundamental to a sustainable, civilised society. My beliefs, though, are rather beside the point. It is those of governments and law enforcement agencies that have me concerned vis-à-vis the future of cryptocurrencies and blockchain technology.

Alex Saunders
Founder, Nugget’s News

As the privacy of both Bitcoin and Ethereum strengthens over the coming years, I fear lawmakers – which, in my opinion, currently do not fully comprehend the ramifications of these imminent privacy-preserving upgrades – will attempt to suffocate the crypto industry altogether.

Of course, the way they’d do this would not be by directly attacking Bitcoin and Ethereum, but by targeting the peripheries of the crypto ecosystem: the entities responsible for administering the fiat on- and off-ramps. Certainly, it’s not difficult to envisage a future wherein overly demanding regulatory requirements – think customer identification and transaction monitoring – make it commercially unviable to operate a cryptocurrency exchange, for example.

To be sure, most governments around the world have been anything but welcoming of blockchain networks like Bitcoin and Ethereum; hardly surprising given their potential to disrupt the monetary system. Certainly, the most extreme regulatory pushbacks have come in relation to privacy-centric cryptocurrencies like Monero (XMR) and Zcash (ZEC). With this in mind, I cannot help but think some troubling times await the still-nascent industry when these various privacy-bolstering upgrades hit Bitcoin and Ethereum in the years ahead.

By Alex Saunders

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