Alloc Init Proposes Shielded Bitcoin Metaprotocol for Enhanced Privacy

Researchers from Alloc Init have proposed Shielded Bitcoin, a metaprotocol that would allow users to convert regular BTC into private notes. These notes can be transferred privately and eventually converted back into ordinary Bitcoin without altering the underlying blockchain.

The concept draws inspiration from Zcash's privacy features, utilizing encrypted notes and zero-knowledge proofs to conceal transaction details, including sender, recipient, and amount. Unlike Zcash, which operates as a separate blockchain, Shielded Bitcoin would function as a metaprotocol on top of Bitcoin.

When sending BTC through the shielded system, users deposit 1 BTC into their normal spendable balance while receiving a private note representing the same amount within Shielded Bitcoin. The system replaces this note with new encrypted notes for the recipient and any remaining funds are returned to the sender. Bitcoin records proof that a valid transaction occurred without revealing which specific note was spent.

The paper cautions that, although privacy is enhanced as more users and transactions accumulate, timing, unusual amounts, fees, or known counterparties can still compromise anonymity. Additionally, peg-ins and peg-outs are not yet fully developed and the authors do not claim that entering or exiting the system will be private or cost-free.