Suppose Alice has bitcoins and wants to send them with maximal privacy, so she creates a special kind of transaction. For anyone looking at the blockchain her transaction appears completely normal with her coins seemingly going from bitcoin address A to address B. But in reality her coins end up in address Z which is entirely unconnected to either A or B.
Now imagine another user, Carol, who isn’t too bothered by privacy and sends her bitcoin using a regular wallet. But because Carol’s transaction looks exactly the same as Alice’s, anybody analyzing the blockchain must now deal with the possibility that Carol’s transaction actually sent her coins to a totally unconnected address. So Carol’s privacy is improved even though she didn’t change her behaviour, and perhaps had never even heard of this software.
In a world where advertisers, social media and other companies want to collect all of Alice’s and Carol’s data, such privacy improvement would be incredibly valuable. And also the doubt added to every transaction would greatly boost the fungibility of bitcoin and so make it a better form of money.
This undetectable privacy can be developed today by implementing CoinSwap. The software could be standalone as a kind of bitcoin mixing app, but it could also be a library that existing wallets can implement allowing their users to send Bitcoin transactions with much greater privacy.
For the last few months I’ve been working on implementing this project, and recently reached another milestone: Multi-hop CoinSwaps.
In the original CoinSwap design there would be only two peers involved, that meant if your wallet did a CoinSwap the other party knew exactly where your coins went. They were a single point of failure in privacy. Multi-hop CoinSwap is where the user routes their coins of multiple CoinSwap peers, and all of them need to collude in order to figure out the final source and destination of the coins.
Just for fun I created a 5-hop CoinSwap on testnet. Each hop has 3 individual transactions:
Taker’s outgoing transactions:
First maker funding transactions:
Second maker funding transactions:
Third maker funding transactions:
Fourth maker funding transactions (also taker’s incoming transactions): https://blockstream.info/testnet/tx/8fde61974a4e0801ae5b76b620e2effd6c837310c1bd76d738216451ae1226e3,
These transactions don’t look particularly special (which is the point), but they are CoinSwaps. Following the CoinSwap protocol, those coins are transferred off-chain to the next market maker. Even though the coin are unspent at the time of writing, they are unilaterally controlled by the other party.
The user created a CoinSwap for 0.05 tBTC in this case (but it could have been any amount), and out the other side they got the same amount of coins (minus a fee) entirely disconnected to their initial coins. The fee goes to the makers which provides them an incentive to cooperate to improve privacy, and also gets spent on miner fees.
From the point of view of someone just passively observing the blockchain, a single-hop CoinSwap is as private as a multi-hop CoinSwap, so I suspect in practice most users will just create 1-hop or 2-hop CoinSwaps.
These example CoinSwaps have a visible 2-of-2 multisig address. But the plan is to later use a protocol called ECDSA-2P which allows us to create 2-of-2 multisig addresses that look the same as regular single-signature addresses. This allows CoinSwaps to blend in with the rest of the bitcoin transactions out there. Even the legacy p2pkh addresses starting with 1 can be CoinSwap addresses.
CoinSwap is the next generation of bitcoin on-chain privacy tech. It improves on CoinJoin because it breaks the transaction graph, and even improves the privacy of people who don’t use it. CoinSwap also uses less block space for the same privacy and therefore is cheaper in miner fees.