Shielded Bitcoin: A Privacy Layer for Bitcoin Without Protocol Upgrade
A New York-based cryptography research group has proposed a way to add a layer of privacy to Bitcoin transactions without requiring miners or node operators to upgrade their protocols.
The design, called Shielded Bitcoin, is based on an encrypted-note model similar to Zcash's. It treats Bitcoin as a bulletin board that stores and orders encrypted bytes it cannot read.
When Alice pays Bob using Shielded Bitcoin, she creates an encrypted note only he can open, then publishes a transfer as ordinary Bitcoin data. The payload includes the encrypted outputs, a one-time serial number (a nullifier) for each note she is spending, and a compact zero-knowledge proof.
The proof asserts that the spent notes exist, that Alice is authorized to spend them, and that incoming and outgoing amounts balance, without revealing which notes or how much they contain. Independent indexer software watches the chain, checks each proof, and rejects reused nullifiers.