Researchers Propose Zcash-Inspired Privacy Protocol for Bitcoin

Cryptography researchers at Alloc Init have proposed Shielded Bitcoin, a protocol that hides transaction details while keeping them on Bitcoin's base layer. The design does not require any changes to Bitcoin's consensus rules and uses encrypted notes and nullifiers.

Shielded Bitcoin borrows its core structure from Zcash (ZEC), but unlike Zcash, it doesn't have its own blockchain to track shielded balances. Instead, transfer data is published directly to Bitcoin, and software called an indexer rebuilds private balance records by replaying accepted transfers in the order they were recorded.

The authors argue that Shielded Bitcoin avoids issues with existing approaches to Bitcoin privacy, such as CoinJoin and Silent Payments, which still make transaction amounts visible on the public ledger. They also note that the design has specific technical trade-offs, including the publication method for cryptographic proofs inside a Bitcoin transaction using OP_RETURN.

The paper outlines an optional compliance layer allowing institutions to verify funds received originated from an approved source and passed through certified recipients without revealing transfer history. The authors have not yet settled on standard numbers of inputs and outputs for typical transfers or resolved how users can verify their own transaction histories without downloading the entire blockchain.