Privacy is a complicated subject. It's not always a simple binary thing, private or not private, seen or unseen. Seen by whom? Private from whom? Private to what degree? If you are walking down the street with a mask on your face no one can see your face, so that means you are private, right? What if you are the only one wearing a mask? Are you private then? People might not be able to see your face, but they can see that you are the only one wearing a mask. If you travel around the same areas frequently, people might not know your face and name, but they can consistently recognize you in the same way people do a familiar face simply by noticing the only person who wears a mask is back again.
So does this really constitute privacy? People might not have your face, so they cannot recognize you if you took off the mask, they might not be able to ascertain your legal identity due to never having seen your face, but they recognize you. They can consistently identify you when you are present in the sense of being aware it is the same individual across multiple incidents of encountering you.
In order to achieve meaningful privacy, you would need a large percentage of the people wherever you are to also be wearing a mask. Only when you are not alone in using a mask does it actually provide meaningful privacy, otherwise it is just as distinguishing and identifiable a feature as your face is. But that's just the start.
Metadata And Behavior Patterns
Even in a scenario where everyone is wearing masks, are they all the same mask? How many different kinds of masks are there? How many people are wearing each type of mask? If there are three types of masks that everyone is wearing, in roughly equal distributions, then there are three groups of people that all blend in with other group members but not other groups. If someone is wearing a totally unique mask no one else is wearing, then we are back to square one.
It goes even further, what clothes are you wearing? How tall are you? What color is your hair? How long is it? How much do you weigh? Are you muscular or non-muscular? Are you wearing boots, shoes, or sandals? All of these little things all of a sudden start making unique fingerprints people can use to identify you if everyone doesn't use the same thing. Wear the same shoes, same shirts, same hats, same masks. Some of these things, like your weight, your height, etc. cannot even be changed to conform exactly with everyone else. You might be able to lose a little weight, but someone who weighs 160 lbs and is 6 ft 2 isn't going to lose 100 lbs and 2 feet off their height to be the same weight and stature as a 12 year old.
Now take things even further. Assume everyone is the same stature, wearing the exact same clothes, walking the same way. You can still be tracked and identified if someone can watch you without interruption. Even if you are of identical frame, wearing identical clothes, identical height, the whole shebang, if I can just watch you uninterrupted from the moment you leave home to the moment you get back at night, I can still surveil and associate every activity you engage in to you. Even if I don't know what your legal name is.
No meaningful privacy can actually be obtained without either preventing entirely the ability to surveil you (not practical at all) or finding blind spots where you can "mix" yourself with other people and obscure who is exiting those blind spots in which direction. Without these places multiple people can go into, where they cannot be surveilled inside, and leave in different orders and exits obscuring who is who, no privacy can be obtained from surveillance. Preventing surveillance in the wider world is essentially impossible, but if you can prevent it just in blind spots people can use for this purpose, that is enough.
This is all exactly how Bitcoin privacy works. Your UTXOs are you, people can see where they were, where they're going, deduce what you are doing with them, and compile a picture of all of this. Coinjoins, coinswaps, even centralized mixers in the imaginary ideal world where they were trustworthy (they aren't), function as those blind spots. Without the possibility of mixers, all of your activity is laid out bare for everyone to surveil on-chain, and without blind spots to go scramble your movement inside of for those watching, it's all taggable and trackable.
Now before we go into anything beyond the analogy, consider things through the lens of the analogy. Think about all the complex changes in your behavior, what you wear, how you travel from A to B, how you have to time up your movements to be able to get to blind spots in sync with enough other people, all of that complexity that you have to consciously manage and engage in.
That is how complex privacy on Bitcoin is right now. That is the lengths people have to go to in order to achieve it, and the level of privacy gained is only proportional to how many other people go to those lengths. That is not a viable solution. Especially when you consider the possibility of the surveilers simply standing outside the blindspots and grabbing people going in and coming out, demanding details of where they went and what they did to reduce the amount of uncertainty of what other people are doing before and after entering.
The Threat Of Checkpointing Blind Spots
The equivalent of those blindspot checkpoints on Bitcoin is your exchanges, your regulated and KYC businesses, that demand explanations and information whenever they see you mix your coins after withdrawing or before depositing. The more people using coinjoins, or mixers, or any technique to function as a blindspot who interact with such services or entities and wind up divulging information end up doing harm to the overall privacy of others using those blindspots. The more people using blindspots to hide their activity who then go on to tell authorities exactly what they did, the less ambiguity there is for those who don't divulge that information.
Imagine the most extreme case of that, there is only a single person in a crowd of thousands of people who is not just divulging everything they are doing to authorities. That person has no privacy at all. With a full account of what every other person is doing, they de facto know everything the one person not giving that information to them is doing. That is the cat and mouse game of privacy on Bitcoin.
It is a very tough game to play, for many reasons. One problem is people actually acquiring Bitcoin. There are options to get Bitcoin without interacting with KYC systems directly, Bisq, Azteco, Robosats, ATMs requiring minimal information, even the possibility to meet directly in person through networks like local meetups. All of these solutions though generally come at a cost premium. The reason for that is most of the Bitcoin available for sale is on KYC exchanges. Centralized solutions to things just point blank have more efficiency most of the time, and that is especially true when it comes to things like order matching and price discovery.
This is ultimately a problem that must continue to be iterated on, like projects such as CivKit are doing. To pull all of those Bitcoin away from centralized KYC exchanges, better solutions must be built that offer a value add that those exchanges cannot in fulfilling the role of order matching and price discovery. If we want to get that Bitcoin away from places that tag it so it can be tracked, then we must outcompete those places in the role they fulfill. Otherwise, the damage to privacy done there can ripple out to people who avoid directly engaging with those services. That avoidance is not guaranteed to be enough.
Someone buying bitcoin KYC-free might think they are safe, but the reality of most bitcoin being on KYC exchanges means there is some trail from there. In all likelihood the person you are buying from bought it from such an exchange, and is KYCed. Those coins flowing out from him regularly represent a quasi-blindspot, and when the authorities show up and demand information they will get whatever they can. Did you contact this person by phone? A social media service that can be subpoenaed? That you identified yourself to? Now the person who thought they are beyond surveillance is surveilled.
This does significantly raise the cost for acquiring that information versus just directly querying exchanges, it doesn't make it impossible, but it makes it more time consuming. And that is the point. They are going to surveil the blindspots, they are going to try and extract information from everyone who uses them. So they need to be absolutely everywhere. From every A to every B. There need to be so many of them it is impossible to surveil them all, to extract information from any sizable number of people using them. Bitcoin needs to be pulled away from KYC sources so that most of the liquidity never interacts with it anymore, instead of bouncing from blindspot to exchange back and forth never creating any real distance.
That starts with outcompeting them as a place to coordinate exchanging bitcoin, but it's not enough alone. Those blindspots need to not only be almost omnipresent, they need to be convenient, intuitive, not prohibitively expensive. They need to be sustainable. They need to be all of these things so that people's behavior actually can shift en masse to regularly using them.
Behavior And Technology
Why do so many people use things like Twitter? Because it's intuitive and simple. There is no laborious process to interact with it, or high mental overhead for figuring out how to use it. Button, type, button. Function accomplished. The same thing with Amazon, or Netflix. No getting in the car and going to the store, walking around looking for specific things, just a few minutes maybe of scrolling and a button press and what you wanted to accomplish is accomplished.
That is how technology really alters behavior at a massive scale, by making it intuitive and easy to use. Look at how all those examples did so globally in the span of a decade in each case. They all altered the entire fabric of the market they entered, and totally altered the nature of how users interacted with those markets, and the behavior they engaged in within them. That is what must be done with software for Bitcoin whose goal is to create these blindspots.
Making Bitcoin Privacy Intuitive
On the side of actually outcompeting centralized exchanges, the problem fundamentally comes down to the issues of order matching and reputation. In other words, a communications channel and bond scheme. A way to prove that you are not a sybil entity spamming the network, and a way to communicate offers to exchange things with each other. These two pieces together form the framework to have an actually decentralized way to price Bitcoin. A bond as a basis for identity in that framework would give a way for entities to attest to past interactions and their outcomes, and for that to be publicly verifiable in sorting through the potential offers being broadcast. Adding escrow and enforceability to bad behavior is as simple as multisig and fidelity bonds, DLCs, or other smart contracts.
We have all the pieces necessary for simple and intuitive tools to make this easy, they just have to be put together. They have to be marketed, and people made aware of them. We need more of them. A scalable and sustainable ecosystem of them that can continue to thrive into the future, especially under external pressure.
It's a very similar thing regarding transacting in a private way. Tools like Samourai Wallet, Wasabi, and Mercury Wallet, all exist right now. Lightning exists right now, though with many shortcomings in terms of user privacy. The nice thing there though, is we understand how to solve most of those shortcomings. It will just take the time and effort to glue them all together, and package them in an intuitive way.
If we go back to the analogy, if doing nothing is walking around in the open surveilled the entire time, things like coinjoins are having regular huts on every block that you walk through with a group of people and obscure yourself at the end of every block; Lightning is like a tunnel system with a checkpoint at the start where you register at the entrance you start from, publicly taking your mask off (but only at the starting entrance), and again when you get back to that point. Gluing these two things together, and fixing the issues on the Lightning side, we get a tunnel system with no internal surveillance, no checkpoints at any entrance, and entrances on every street corner.
We have on-chain privacy tools, and we have the start of off-chain privacy tools with Lightning. Fixing the shortcomings of Lightning, we have a scalable and cheap way to transact off-chain without leaking information about individual payments. With coinjoin now, we have a way to obscure the connection between individual on-chain UTXOs. Putting those two together properly, something not currently done, you have scalable and private off-chain payments with tooling to obscure who funded what channels. You have a tunnel system that is entirely private inside, with no way to identify who is entering or exiting where.
Doesn't that sound much simpler than identifying yourself at an entrance after a walk through numerous blindspot huts to prevent people following you from home to there or vice versa? What if you had an entrance to the tunnel system in your home? None of that is going to happen without wider collaboration, without combining the individual pieces. The tools available now are better than nothing, but it is still not sustainable or intuitive enough at all to really gain any wide meaningful use. They're not comprehensive enough in looking at the whole picture and packaging it in an intuitive and yet comprehensible way.
The reality is most coins are still on or cycling through KYC exchanges, most coins are not using existing privacy tools. The reality is the successful grabs by authorities at large troves of identifiable information to tag and track people are becoming more frequent. This is what most of the simplest tools encourage. Activism and tribalistic elitism and bickering isn't going to change that, long-term sustainable solutions that are simple and accessible enough that people will use them will.
This is too important to screw up, and it's not something we have all the time in the world to solve. The form technology takes informs the behavior it creates, and right now most of the technological tooling for interacting with Bitcoin is encouraging behavior that fundamentally undermines privacy. That is ultimately what this entire issue is about. Behavior. Privacy is simply not achievable alone, it requires numbers. Yet it also requires a very large change in behavior, and for a large number of people to engage in that change. Bad behavior is entrenched right now.
The only way to change that bad behavior is with tooling that reinforces privacy that is just as intuitive, simple, and sustainable. Bickering tribally won't make tools.
Source: Bitcoin Magazine - Bitcoin News, Articles and Expert Insights