Bitcoin Researchers Propose Shielded Transfers Without Protocol Changes
A new proposal for Bitcoin privacy has been published by researchers Clara Shikhelman, Mikhail Komarov, and Aleksei Moskvin of [alloc] init. The draft, titled 'Shielded Bitcoin: Private Transfers on the Bitcoin L1', aims to make sender, recipient, transfer amount, and earlier payments invisible without altering the Bitcoin protocol itself.
The proposal uses a metaprotocol that sits on top of the existing blockchain, using its data without interpreting it. This approach differs from previous attempts at increasing Bitcoin privacy, which required coordinated rule changes. The authors borrow concepts from Zcash, an older cryptocurrency with built-in encryption.
Key components include encrypted notes, nullifiers, and zero-knowledge proofs. Notes replace openly readable transaction outputs on Bitcoin, while nullifiers prevent the same amount from being spent twice. Zero-knowledge proofs demonstrate that the sender is entitled to the notes used and that the sum of inputs matches the sum of outputs.
The proposal depends on additional software, an indexer, which verifies the proofs. This approach has its advantages and drawbacks: it requires no consensus rule changes but relies on the correctness and adoption of the additional software. If the scheme fails or never catches on, all that remains on the chain is a data stream nobody can interpret.
The paper acknowledges that the system is not quantum-resistant and that the Groth16 setup ceremony poses risks. However, some experts agree with the direction of travel, seeing it as a step towards increased privacy for Bitcoin users.