Researchers Propose Shielded Bitcoin Protocol for Private Transactions

A team of researchers from [[alloc] init], led by Clara Shikhelman, Misha Komarov, and Aleksei Moskvin, have proposed a new protocol for private Bitcoin transactions called Shielded Bitcoin.

The proposal aims to enable users to make shielded transactions without requiring operators, soft forks, or other changes to the Bitcoin consensus. This is achieved through a novel privacy metaprotocol that defines a transactional structure and indexing protocol for strong privacy-preserving transactions.

The Shielded Bitcoin protocol relies on Bitcoin PIPEs (Programmable Input-Output Private Encryptions) for pegging funds into and out of the system. The design is similar to Bitcoin's, but with key differences in how transactions are structured and verified.

A Shielded Bitcoin transaction is essentially a blob of data with a prefix included in a Bitcoin transaction using OP_RETURN or another data-carrying method. It has no meaning to the Bitcoin network, which does not verify or enforce any rules against it. However, an indexer can passively watch the blockchain and ignore invalid transactions.

The protocol uses a nullifier set instead of deleting spent notes like Bitcoin does with UTXOs. This allows users to publicly post an encrypted proof and nullifier that a note has been spent without revealing which note was spent. Indexers build a merkle tree of every note output created, along with the nullifier set.

To use Shielded Bitcoin, users need only a Bitcoin node and a Shielded Bitcoin indexer, eliminating the need for service providers or off-chain state to recover funds.