Privacy in Bitcoin: Empowering Users & Creating a Vibrant Fee Market After the Last BTC is Mined

From Sweden to China, the world is slowly but surely trending towards a cashless society and transacting with bank cards, Venmo, and surge of mobile apps is the result of it.

DIgital payment rails are embraced because they are convenient but nothing is free and we have to pay the third parties in the process. Apart from fees, lack of privacy is another factor that we get hit by when making digital payments.

In the absence of this financial privacy, individual freedom can be denied as every purchase is traced and censored. This is where Bitcoin offers us the benefits of digital payments while providing privacy. However, in spite of being pseudonymous, Bitcoin still has a number of privacy concerns as the transactions happening on its network are publicly announced in the system.

Often perceived as an anonymous payment network, it is rather in a way a transparent payment network that provides acceptable levels of privacy. This is why privacy as a feature on Bitcoin has been gaining traction among the crypto community and developers as they are working on adding this feature on the flagship cryptocurrency.

Developers are already working on Schnorr signatures for bitcoin to enhance the privacy element on its network. It is a digital signature produced by the Schnorr signature algorithm described by Claus Schorr.

Inevitability of Privacy

Lucas Nuzzi, the Director of Technology research at Digital Asset Research in his latest medium post shared the inevitability of privacy in Bitcoin talks about Schnorr signatures that is becoming a popular choice for altcoins.

In early 2018, Gregory Maxwell, Pieter Wuille, Andrew Poelstra, and Yannick Seurin published a white paper on MuSig, a Schnorr-based multi-signature scheme.

MuSig in Bitcoin will natively support key aggregation that improves the privacy of multi-sigs, enable smart contract solutions like Taproot, improve security, and increase the efficiency of transaction validation. The next step for Bitcoin privacy is cross-input aggregation that:

“further increases the efficiency of Bitcoin transactions. But, most importantly, it may enable strong privacy-preserving mechanisms on Bitcoin’s base layer.”

It further improves CoinJoin, a privacy-preserving technique transactions on Bitcoin. However, CoinJoin has some issues in terms of reliance on a significantly large number of users to obfuscate their balances and the identifiability and the potential censoring of the entire transaction.

Nuzzi further says mass adoption of Bitcoin depends upon the “strength of its privacy guarantees.” And today, the most alarming issues surrounding bitcoin are the need for privacy and its long-sustainability without block reward which Schnorr enabled privacy mechanisms can potentially address.

“Demand for privacy directly translates into an increase of on-chain transaction fees,” says Nuzzi while further adding that though initially, just like SegWit, users will champion its adoption, businesses will have to follow at some point if they want to remain relevant.

“Ultimately, the adoption of stronger privacy mechanisms on Bitcoin’s base layer will further empower its users and, at the same time, could contribute to the creation of a vibrant fee market after the last Bitcoin has been mined.”

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