Pillars of Bitcoin: Privacy

Day 5: Rubin's Bitcoin Advent Calendar

Welcome to day 5 of my Bitcoin Advent Calendar. You can see an index of all the posts here or subscribe at judica.org/join to get new posts in your inbox

Privacy is foundational to Bitcoin. Fundamentally, we care about censorship resistance so folks can’t stop you from doing activity they can tell you’re doing… but what if they couldn’t tell you were doing anything at all? The more private a system is, the better it is at ensuring that all participants are free to do as they wish.

Unfortunately, privacy is one of the most difficult things to achieve in the universe. For every action there is an equal and opposite reaction; if one wants to make an action, how can one ensure the reaction is not observable? And if one masks the reaction, how can one hide the masking?

Privacy exists in a delicate position in our society. America is hands down the leader in rights to privacy of any society, but citizens still face a barrage of assaults against their privacy. Privacy from the government also differs from privacy from corporations, and the corporations often times can be in cahoots with the government. Some regulatory regimes (e.g., the EU) claim to be “better on privacy” than America, but have overall a weaker sense of individual rights than in America (so they may be better at the privilege of privacy, but not at the right to it).

Why is privacy so delicate? In part, because unlike speech there’s no explicit enumerated right to privacy¹. Privacy is an unenumerated right under the American constitution. What this means is that legally we do believe it to be a right because it seems to be implied by other constitutional protections that could not exist without it (e.g., the right to not be searched without due process). Because there’s not explicit protection of privacy, it’s a constant battle to determine what constitutes an violation of privacy. For example, if your house is extra hot because you’re growing pot in it (or hint hint Bitcoin mining), can police use thermal cameras to detect it and then establish probable cause to get a warrant and raid your house? See Kyllo v. United States, that’s an illegal search baby! However it’s possible that this line would erode over time as the expectation of privacy changes – if everyone had thermal camera sunglasses and could see your pot growing plain as day, maybe it’d be unreasonable to think you’re private!

Cryptographic research has yielded amazing tools for creating provable privacy for digital actions. For example, it’s possible to send a digital message in a manner such that only the intended recipient can read it. And as long as your spying adversary isn’t standing over either of your shoulders looking at your screen (or more realistically, running a scanning program on all your data like the one Apple said they might be doing earlier this year), the only people who will know the contents of the message are you and the recipient.

The government kinda sorta hates this stuff!

Because the bad guys can use it! But, because America is super free privacy loving country, citizens still have a basically unlimited protected right to use whatever privacy technology they want. Many politicians have mentioned wanting backdoors into software, but none have truly succeeded to introduce much truly limiting. Not to mention you can’t make math illegal, which is all that cryptography is. Alphabet soup agencies resort to trying to insert backdoors, but these are still subject to public review and the information revealed could only really be used legally for big “national security issues” like against a group with a pre-existing warrant, but the general collection of information would be illegal under the expectation of privacy right. At least in theory – Snowden showed us that mass data collection does still happen… But cryptography gets better, and open-source supply chain devices become better, so inserting backdoors in the code becomes harder and harder.

So great, probably solved for Bitcoin, right? Just Crypto It. Not quite. While systems like ZCash do exist that make transactions much more private, they take up more space, so they decrease the availability of block space… however, perhaps with better privacy, there’s less ability to discriminate against different transaction sources, so less decentralization is needed to guarantee censorship resistance.

This points to another conflict, which arises with privacy: auditability v.s. transparency v.s. Deniability.

An auditable system means that anyone can verify the history of all transactions and check for validity transparently. Many bitcoiners have a preference for “elementary school math”, where validating the transaction record requires very basic math in the code, and not much else. However, if you go to a fully encrypted form, you might no longer be able to easily check important rules like the amount of coins not being increased through a crypto backdoor. This type of auditability where you could “do it by hand on a calculator” we’ll call transparency, since you can see everything! If it were encrypted, it would be opaquely auditable. You could tell it’s valid, but not the specific transfers that happened. Maybe no one person is going to look through all the data, but across all humanity someone is bound to audit at least the transactions they’re involved in.

Deniability stands in contrast to either of these properties. If, say, a government agency comes to you and says “hey, we know you controlled key X, please show us all transactions that X was involved in”, a deniable system would allow you to produce any answer, making such a query useless. However, if a system was strongly deniable like that, it would be very hard to audit because the audit could potentially turn up differing results. So Bitcoin transactions aren’t particularly deniable by default.

One of the drawbacks of Bitcoin’s auditability is that the auditability is forever. So if you have a lapse of privacy, all your old information can be checked. So let’s say you bought a coffee in 2021, and in 2055 the government decides all coffee drinkers are going to go to jail to pay for their drug use sins, then your old cafe might be able to reveal you as a customer. Bitcoin never forgets.

It’s My Data and I want it Private Now

Therefore it’s an urgent priority to make Bitcoin as private as possible as soon as possible in order to keep users safe now and forever, or else the fundamental usability of the system is at risk. However, compromising on auditability or decentralization would be unpopular, so it’s not as simple as adding ZCash and increasing block space.

There are a lot of different pathways Bitcoin can take to increase privacy. For example, the lightning network can mask and make many payments ephemeral, as well as adding deniability if one continually signs false histories of revoked txns. Sidechains can add all sorts of privacy primitives, if they want. And on-chain techniques like swaps or joins can be used to make the base privacy better as well.

In future posts we’ll explore how covenants can have a role in improving privacy!