Bitcoin (BTC) transactions are not entirely anonymous. In fact, the records of transactions can be viewed by any one of us. However, there are several ways to improve your privacy on the bitcoin network.
And soon, a new tool will hopefully be added: CoinSwap. With CoinSwap, transactions look like normal transactions from the outside, but it is no longer possible to trace who the new owner of the transferred bitcoin is. CoinSwap leaves no trails for analysts to chase. This principle is further explained on Chris Belcher’s GitHub.
So what’s the idea?
Imagine a future where a user Alice has bitcoins and wants to send them with maximal privacy, so she creates a special kind of transaction. For anyone looking at the blockchain her transaction appears completely normal with her coins seemingly going from address A to address B. But in reality her coins end up in address Z which is entirely unconnected to either A or B.
Now imagine another user, Carol, who isn’t too bothered by privacy and sends her bitcoin using a regular wallet which exists today. But because Carol’s transaction looks exactly the same as Alice’s, anybody analyzing the blockchain must now deal with the possibility that Carol’s transaction actually sent her coins to a totally unconnected address. So Carol’s privacy is improved even though she didn’t change her behaviour, and perhaps had never even heard of this software.
In a world where advertisers, social media and other companies want to collect all the data from Alice and Carol, these privacy improvements can be very valuable.
This undetectable privacy can be developed today by implementing CoinSwap. However, more is needed than that: there are several building blocks that make a good system. The software can exist as a standalone bitcoin mixing app, but it can also be implemented through existing wallets. This allows users to use bitcoin transactions with more privacy.
Just like CoinJoin, CoinSwap is developed by Greg Maxwell in 2013. CoinJoin is relatively easy to implement, but that is not the case with CoinSwap. However, the idea is very promising and solves a lot of problems that CoinJoin does experience.
Alice and Bob can trade bitcoin with each other by first sending the transaction to a CoinSwap address and then sending the BTC to Bob.
Alice’s Address 1 —-> CoinSwap Address 1 —-> Bob’s Address 1
A completely different set of transactions then gives Bob’s money to Alice:Bob’s Address 2 —-> CoinSwap Address 2 —-> Alice’s Address 2
This method prevents an outsider from linking Alice’s addresses. There is no transaction between the two addresses. Address 2 can be an address belonging to Alice, but also to someone else where she sends her money. This prevents that you can trace the owner of the address that receives the bitcoin.
CoinSwap is a very promising privacy protocol because it ensures that the recipient of a bitcoin transaction becomes anonymous. However, this application is only one of the factors needed to make better use of BTC for privacy reasons.
If CoinSwap is implemented in popular wallets (existing or new) it increases privacy for everyone on the network.
Belcher says he wants to make this software, the code is free to use for everyone. The first code to review is now on GitHub. If you’re not technically skilled and still want to contribute, you can donate to the project.