The mirage of finality
Source: bitcoinmagazine.com
Possibly the most promising proposition for improving both privacy and finality in Bitcoin transactions is Silent Payments. An enhancement protocol known as BIP 352 aims to boost transaction privacy by enabling users to receive payments without disclosing their public addresses on the timechain. Silent Payments employ a blend of stealth addresses and key derivation techniques to significantly complicate the tracking of funds. The efficacy of Silent Payments lies in their provision of strong privacy guarantees while upholding the finality characteristics of on-chain Bitcoin transactions. In contrast to off-chain solutions, Silent Payments function directly on the Bitcoin timechain, ensuring that transactions benefit from Bitcoin’s robust “technological settlement” framework. This approach could substantially improve coin fungibility and counteract attempts at transaction reversal.
While many bitcoin supporters trust in the unchanging principles of math and physics for transaction finality, McKenzie points out that the sociolegal aspects of finality can frequently override technological aspects. He encapsulates the idea as follows: “If you and the United States federal government differ on whether a transaction is final, you are mistaken.”
Nevertheless, this is mostly beside the main issue. A significant number of bitcoin transactions – recently exceeding one billion – remain susceptible to reversal through traditional legal and political means. The innovation of technological finality offered by bitcoin is noteworthy, but it does not erase the power structures’ influence over most real-world transactions.
The inherent lack of privacy in bitcoin has been a contentious topic, particularly regarding its implications for transaction finality. The transparent nature of the Bitcoin timechain, where each transaction is publicly documented, makes it relatively easy to associate transactions with real-world identities. While this transparency can enhance trust and auditability, it also leaves users vulnerable to coercion, challenging the core notion of an ultimate settlement.
The Lightning Network, originally designed to increase Bitcoin transaction capacity beyond what on-chain transactions allow, also furnishes privacy benefits. By conducting payments off-chain, Lightning diminishes the amount of information visible on the public timechain. The addition of onion routing to Lightning payments further augments privacy by obscuring the identities of the involved parties. Nonetheless, Lightning presents a unique tradeoff between privacy and finality. Although users can conceal their identities, their funds may become vulnerable to potential loss or theft by channel operators or counterparties, which could jeopardize the finality of transactions.
Promising technologies for bitcoin privacy
However, the Bitcoin community is actively innovating. Several promising privacy technologies are being developed to tackle these issues, each providing distinct strategies for bolstering privacy and, in turn, the finality of transactions.
In a thought-provoking blog entry titled “Finality is a myth in payments,” Patrick McKenzie presents a strong case that questions the typical perspective on transaction finality. He argues that finality should not be seen as an absolute term, but as a “technosociolegal construct.” Essentially, the finality of a transaction hinges on the interaction between technical capabilities, societal norms, and legal systems.
The technological aspect of bitcoin’s finality should not be overlooked. Unlike previous forms of currency, bitcoin empowers its holder to resist coercion by destroying or refusing to disclose a secret key, rendering the funds permanently inaccessible. In contrast, all previous forms of currency can be seized through physical confiscation or intervention from custodial third parties.
The prevalent belief around six confirmations focuses solely on the technological side of settlement. True finality remains out of reach if a dominant power, like a major government, can pinpoint the individuals involved in a transaction and exert pressure to reverse it.
While this “nuclear option” for technological finality is possible with bitcoin, it is only likely to be employed in extreme situations. Even then, utilizing it effectively eliminates the bitcoin involved in the transaction – meaning that the payer’s transaction will be final, but the payee will no longer have access to the funds. This represents a sort of reversal, at least for one participant in the transaction.
However, making Silent Payments a standard feature in Bitcoin wallets will pose challenges. They affect timechain size and cannot be implemented in lightweight clients, which many Bitcoin users commonly utilize. Despite these hurdles, Silent Payments signify the most promising avenue for enhancing settlement finality proposed to date, providing a pathway for Bitcoin to realize genuine final settlement.
One notable innovation is Fedimints, which are community-managed custody solutions that merge the privacy advantages of CoinJoin-like mixing with the scalability of the Lightning Network. Fedimints utilize blind signatures and Chaumian e-cash principles to provide robust privacy assurances for users within trusted communities. This week, Fedi, a key player in Fedimint technology, unveiled a full-featured app that enables anyone to establish a federated mint in their neighborhood. While Fedimints enhance transaction privacy within a user community, they offer limited privacy for on-chain transactions and rely on the operators’ integrity, introducing a new set of risks.
