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In the fight to reclaim sovereignty in the digital age, Bitcoin has become one of the most powerful tools at our disposal. Bitcoin has the  ability to separate money from the State, facilitate direct peer-to-peer transactions, and break the financial censorship and surveillance so rampant in our world today. Therefore, it is immensely important that anyone seeking freedom learn to use it. However, one of the core features of peer-to-peer currencies that we’ve come to love in physical cash is privacy — no one but the people in a cash transaction know how much is transacted, for what, and with whom.

Therefore, privacy in an open society requires anonymous transaction systems.

Eric Hughes, “A Cypherpunk’s Manifesto“

Bitcoin’s design is one that focuses on security (ensuring only owners of funds can spend them), auditability (ensuring no one can arbitrarily create funds), and censorship-resistant peer-to-peer payments, and has proven over the years to do each of these things *extremely* well. One of the keys to Bitcoin’s early adoption and growth was the ability for anyone testing it out to easily see the flow of funds, understand how bitcoin was created through mining, and confirm that the network did what it was supposed to.

We’ve since moved on from Bitcoin’s early days into an increasingly adversarial environment, one filled with chain surveillance companies, hackers, and controlling governments. This has made it clear that Bitcoin suffers from a privacy problem due to transactions being merely pseudonymous instead of anonymous. In order to fully enable financial sovereignty and better realize the censorship-resistant design of Bitcoin, solutions are needed to allow users to use it as the digital cash we so desperately need. In this series we will walk through why we need better privacy in Bitcoin, what pieces of data are most important to hide or obfuscate, and the tools and techniques that have been created and implemented to enable this.

Ultimately, we at Foundation care deeply about user privacy and want to ensure that every one not only has access to a superior store of value in Bitcoin, but also one that can be stored and spent freely, anonymously, and without censorship.

The threat of identity + Bitcoin

One of the most powerful things that Bitcoin did was to detach money from identity, state, and institutions, giving  anyone access to a new, free, and uncensorable type of money. Many of these states and institutions, however, would love nothing more than to co-opt and cripple Bitcoin’s power for the individual through chain surveillance and the introduction of lawless and shadowy “regulations” put into practice under the guise of our protection. One of the most powerful ways that they can seek to limit the power and sovereignty that Bitcoin grants to each of us is to tie our identities back to Bitcoin, often through the use of regulations like “Know Your Customer” (KYC) and “Anti-Money Laundering” (AML) controls.

These controls force users of centralized services and exchanges to give up egregious amounts of personal data in order to convert fiat to Bitcoin (or vice-versa). This data is then easily tied to our usage of Bitcoin, leading to simplified surveillance by chain surveillance companies, confiscation by governments, and theft by bad actors who hack these exchanges and steal our private data. As Bitcoin’s ledger is openly available and stored on thousands of computers around the world, it reveals large amounts of financial information to anyone with a web browser.

Consider this common example: imagine you head to your nearest cafe and buy a coffee with Bitcoin, but you do so without having taken steps towards better privacy. When you pay the barista, they can use their smart phone or computer to see how much Bitcoin you own, where else you spend it, how much you earn, etc. While we generally have quite poor financial privacy today from institutions (think about your bank or credit card company), we expect strong privacy from merchants and random individuals we interact with.

Satoshi’s prescience on KYC/AML

In Bitcoin’s whitepaper, Satoshi saw that the first key to enabling Bitcoin to be used in a private (and thus censorship-resistant and sovereign) manner was to keep the user’s identity off-chain at all costs. When identity is detached from Bitcoin transactions, even the pseudonymity of addresses is a reasonably strong form of privacy for the most common threat models. It may not be perfect, but when bad actors have no clear connections to identity, the job of chain surveillance becomes drastically more difficult. When we choose not to link our identity to our Bitcoin usage we can break many of the most common surveillance methods used and make Bitcoin a much more powerful tool.

The pervasive threat of KYC/AML regulations tying identity to our Bitcoin activity is only increasing, and those who are able to avoid this creeping invasion of privacy have a monumental head start when it comes to Bitcoin privacy. Satoshi was quite prescient when he grasped the disassociation of identity and Bitcoin being important, detailing how this would separate Bitcoin from the traditional financial system and grant greater privacy and freedom. Although this regulation has led to centralized exchanges requiring identification, there is a growing and rapidly improving segment of the space that is focused on building out decentralized methods to exchange that can allow us to buy and sell Bitcoin anonymously (or pseudonymously) and avoid ever relinquishing  our personal information. Exchanges such as Hodl Hodl, Agora Desk, and Bisq allow Bitcoiners to escape the KYC/AML surveillance mechanism and give us an invaluable advantage when it comes to Bitcoin privacy.

“… privacy can still be maintained by breaking the flow of information in another place: by keeping public keys anonymous.”
Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System”

While most Westerners may not be too concerned with this reality at present, many around the world have come face to face with what happens when their identity is easily tied to financial activity. This pairing can lead to de-platforming, repression, confiscation, and other attacks that limit the power they gain from using Bitcoin. We have seen a rise  in surveillance and censorship across the world, but thankfully we have the tools at our disposal to fight back. Our aim is to maximize the impact of Bitcoin in the hands of each sovereign individual, and one of the core ways to do that is to properly leverage the tools available to us.

HOw was privacy viewed in Bitcoin’s early days?

While most people will first acquire  Bitcoin through these centralized and regulated exchanges, even those who avoid KYC entirely deserve strong on-chain privacy for their money. As we see in the Cypherpunk’s Manifesto, anonymous ways to transact are key to broader privacy and freedom, and can best enable us to reclaim our financial sovereignty. If our ability to store and spend our money freely is eroded via surveillance and control, the rest of our rights as humans can be  quickly degraded.

Enter Bitcoin privacy tools.

Since the very early days of Bitcoin, developers and members of the community have spent countless hours devising methods to preserve privacy in Bitcoin to further protect users and empower its censorship-resistance. While this was a core focus early on, many in the community may not be familiar with how critical this topic was to many of the early Bitcoiners who paved the way for us. Many of the concepts used in Bitcoin and other cryptocurrencies focused on privacy were discussed or created in the first few years of Bitcoin’s existence by Bitcoin legends like Satoshi, Hal Finney, Greg Maxwell, Peter Todd, and Adam Back.

Hal Finney set the tone early on in Bitcoin

Hal Finney set the tone early on in Bitcoin as he immediately saw the privacy implications of a fully transparent system. Finney was an early pioneer and privacy advocate, contributing greatly to the PGP protocol and authoring key emails to the early cypherpunk’s mailing list. While Hal Finney was one of the first to think deeply about how to bring anonymity to Bitcoin, Satoshi and many others joined in throughout the early years. Between 2011 and 2013, we saw “stealth addresses”, “PayJoin”, “CoinJoin”, “Confidential Transactions”, and “Borromean Ring Signatures” all proposed and discussed around the Bitcoin community.

While many of these early concepts were never broadly implemented in Bitcoin, one idea did start to gain traction in 2013 — CoinJoins. Greg Maxwell playfully proposed the concept of CoinJoins in a Bitcoin Talk thread titled “I Taint Rich!”, inviting random users to work with him to create collaborative transactions. The idea was that these transactions would create false links between his coins history and that of other Bitcoin Talk users, sowing doubt in chain surveillance companies analysis. These early Bitcoiners paved the way towards a better Bitcoin by taking the time to create, propose, and discuss amazing concepts like CoinJoin.

The first public CoinJoin transaction

In Bitcoin, one of the fundamental heuristics used to attempt to trace coins is called the “common input ownership heuristic”, one that assumes that any inputs to a transaction are owned by the same entity. If we can break that heuristic by having Bitcoiners work together to build transactions, we can make it much more difficult to surveil our activity on-chain. At the same time, CoinJoins allow us to build these transactions in a way that makes it extremely difficult to correctly guess which input is connected to which output — breaking the deterministic links that are the norm within Bitcoin and granting strong transactional privacy.

Paving the way towards a better Bitcoin

While concepts like CoinJoin were only the beginning, they would lay the groundwork for many of the most powerful Bitcoin privacy tools at our disposal today. But how does CoinJoin work? What do we achieve when we build these collaborative transactions? What information do we need to hide when we transact in Bitcoin?

We must defend our own privacy if we expect to have any.

Eric Hughes, “A Cypherpunk’s Manifesto“

We’ll take a deeper look at the data that we must protect in order to defend our right to privacy in part 2 of this series, and then dive into how we got from the early concept of CoinJoin to the mature tools we have at our disposal today in part 3, including what we have in store for Passport and Envoy users in the near future.

Learning more