The Bitcoin white paper explains and elaborates on privacy in Bitcoin in its tenth section. It elaborates on how its privacy compares to traditional models and how users can protect and maintain their privacy. In the BSV Academy course on Bitcoin Theory, the passage in question is contextualised sentence by sentence and made understandable in detail.
How privacy is constituted in Bitcoin
Bitcoin is not suitable for anonymity. As the white paper puts it, this stems from the ‘necessity to announce all transactions publicly.’ The course explains further that it is the knowledge proof required by the locking scripts in Bitcoin outputs that reveals certain information about the receiving party of a transaction.
This information becomes a vector for revealing the identity of the receiver. However, users can remain pseudonymous by not publishing these details onto the ledger and by storing transaction records off-chain instead. The white paper compares this model to the handling of transactions in stock exchanges, where time and volume of transactions is publicly announced, but not any information on the identity of the transacting parties.
Advantages over traditional models
Compared to the traditional financial system, Bitcoin’s privacy model has the advantage that user data is no longer stored centrally in a single silo. Such silos are repeatedly the target of attacks and lead to massive damage in the economy and compromise the security of data on a global scale.
In contrast, in Bitcoin, data is secured in local silos that cause far less damage if compromised. Moreover, individual users are no longer helpless in the face of attacks if they behave impeccably themselves and use secure infrastructure.
Further measures to maintain privacy
Specifically, public keys are included in transactions. They are not linked to any other identity information, thus making users pseudonymous. However, they become a vector that can be used to reveal the identity of a user.
This vector would become more sensitive with each transaction, as transactions can point to a specific owner if used frequently. The white paper therefore suggests that a new key pair should be used for each new transaction. This way, coins are separated on the ledger.
The Bitcoin Theory course explains the practice of this under the umbrella term of Hierarchically Deterministic Keychains in further detail.
The last sentence in this section also warns of the practice of linking inputs, i.e. when multiple inputs pay one larger output. From such a transaction, it can be deduced that the inputs likely belong to the same owner.
Enrol in the Bitcoin Theory course of the BSV Academy
The white paper is still the central document for understanding how Bitcoin is designed and how it works. If you are interested in Bitcoin and want to understand its basics, we highly recommend the free Bitcoin Theory course of the BSV Academy. The course is designed as a beginner course and requires no technical experience.
The course goes through the Bitcoin white paper section by section, elaborating on the concepts contained within each. To make it as effortless as possible for you to have access to this educational material, we are publishing the entire course here on our blog.
Stay tuned for a section-by-section release, and remember that you are still welcome to enrol in the BSV Academy to gain a certificate of completion to add to your resume.
