How to protect privacy in Bitcoin
Today, according to Coinmarketrate.com off-chain protocols such as Lightning Network, Liquid Network and others offer the ability to make transactions with BTC, without the need to publish information in the Bitcoin blockchain.
Let’s see what alternatives exist today to preserve the privacy of your Bitcoin and ourselves.
- Know how Bitcoin works
Before implementing any tool to improve your privacy, it is necessary to understand how Bitcoin works, especially in terms of tracking.
All Bitcoin transactions are public and permanently stored on the BTC network. The addresses of this cryptocurrency are the only available information that allows you to find out where the BTC is stored when they are sent. These addresses are created privately in each user’s wallet, but after they are used, they are marked with the history of all transactions in which they participated.
Anyone can view the balance and all transactions at the address.
If the user needs to disclose his identity in order to receive a product or service, the address will no longer be completely anonymous.
That’s why the second tool we have to protect privacy is focused mainly on this problem.
- Using new addresses to receive payments
To protect privacy, it is convenient to use a new Bitcoin address every time we receive a payment. In addition, we can use several Bitcoin wallets for different purposes.
Thus, we isolate each transaction so that they cannot be linked to each other.
As a result, anyone who sends you Bitcoin cannot see how much money you have, or what other addresses are at our disposal. And most importantly, what do you do with them.
This is one of the most important tips to take into account.
- Protect your IP address
Bitcoin is a peer-to-peer network that allows anyone to view the transfer of transactions and track IP addresses.
Although full nodes transmit other users’ transactions as their own, which may make it difficult for someone to find your IP, the reality is that it may eventually become known.
The best thing in this case is to hide your computer’s IP using a tool like Tor so that they have less information.
- Be careful in public
If you do not plan to receive public donations or payments that are completely transparent, posting a Bitcoin address in any public place, be it a website or a social network, is not a good idea if you care about privacy.
If we do this, then as soon as we transfer funds from this address to another address in our possession, we will compromise both this and the other address.
At the same time, we should be careful not to publish information about our transactions or purchases, as someone can identify our Bitcoin addresses.
CoinJoins transactions are a simple and effective way to maintain confidentiality and hide where BTC is coming from.
This type of Bitcoin transaction is an operation in which there are multiple inputs provided by different users and multiple outputs with the same number of Bitcoins in each.
Thus, it will be very difficult for any observing third party to determine who owns each result of the transaction.
There are some alternative wallets and services such as JoinMarket, Wasabi and Samourai that offer CoinJoin solutions to protect user privacy.
The advantage of CoinJoin is that it helps to destroy the heuristic of shared ownership of inputs, according to which all inputs in a transaction belong to the same person.
Although, by generating results with the same amounts, CoinJoin also violates the heuristic of round sums. This is due to the fact that round results are often seen as dispatches for other people and results that are not changes.
- PAYJOIN, COINSWAP and others
Currently, it is not difficult to make a deal with CoinJoin, since there are many options and enough liquidity to implement them.
The problem is that they have a bad reputation:
- They have many inflows and outflows.
- All outputs have the same amounts
Fortunately, there are people working on other solutions that increase privacy and are not as obvious as this, or give more guarantees.
Some of them are PayJoin (P2EP) and CoinSwap, which try to improve what CoinJoin offers without making transactions different from the usual ones.
In the future, these technologies will probably allow us to abandon those deanonymization strategies that are currently used by blockchain-based analytical companies.
- Lightning Network
The Lightning Network was created in order for Bitcoin transactions to be made almost instantly and very cheaply.
Because it is a peer-to-peer and decentralized solution, Lightning is also a very private network.
Fast and almost cost-free transactions can be carried out only with the knowledge of the payer and the recipient, and transactions are not stored in any public database.
In addition, the technology uses onion routing to send payments, which makes it much more difficult to track payments.
Sidechains, such as the Lightning Network, are created for integration into the Bitcoin blockchain. These are opportunities to increase Bitcoin privacy.
For example, the Liquid Network allows you to convert BTC tokens into Liquid tokens on the Liquid blockchain, where we can send them at a very low price and anonymously. At any time, the Liquid token can be exchanged back for Bitcoin tokens on the blockchain of the main cryptocurrency.
Unlike the Bitcoin network, the Liquid network allows you to hide the amounts sent in transactions, which significantly increases privacy.
However, the disadvantage is that it is not fully decentralized. Instead, it is run by a federation of organizations that are responsible for the integrity of the network.
Improving privacy on the Bitcoin network is possible, and all thanks to developers who are focused on creating solutions for this, and measures taken by users using their own funds.
However, in the end, it’s always a race with companies and governments looking for solutions to try to counter this.
Wherever there is technology that improves privacy, there is also technology that restricts it. It’s like a dog chasing its tail.
Thus, this is not a static, but a dynamic task. We should always be concerned about this aspect.