Btc privacy tradeoffs, overt and covert \ stacker news ~bitcoin

14k sats \ 36 comments \ @elvismercury 2 Dec 2023 bitcoin

(The fourth post in the meta-experiment series of the Broken Money book club, part 5. Check out the third.)

Lyn talks a number of times about the tradeoffs made by technologies in general, and btc in particular. The most well-discussed of these tradeoffs is probably the block size, where you trade the number of transactions you can fit into a block against the cost to run a full node.

Another tradeoff comes with privacy. Unless you're deep into the technical side of btc, you might not realize the full extent of what's at stake in these tradeoffs:

To increase privacy, some degree of auditability needs to be sacrificed. One of the key things about Bitcoin is that any node can tell you the exact bitcoin supply and maintains the entire history of transactions and the full state of the ledger. That’s not possible to the same degree in a privacy-based blockchain. Cryptocurrencies that are private at their base layer make it easier for undetected inflation bugs to occur. In addition, if a privacy-based system doesn’t have a serious network effect, its privacy likely isn’t as good as advertised because the anonymity set is very small and is therefore somewhat trackable. (p. 337)

Those tradeoffs make sense, even if they're not immediately apparent to all users. Although Lyn doesn't frame it this way, there are other kinds of tradeoffs that come with privacy, too. For instance:

Income taxes within the current system rely on ubiquitous financial surveillance to be enforceable. If it becomes commonplace for people to send money peer-to-peer, including globally, and there are a large variety of privacy tools to make transactions hard to track, then it may become untenable for governments to tax incomes as their primary source of revenue. (p. 333)

Most stackers are probably thinking to themselves: fuck the state, I can't wait till they can't get any tax revenue! But I wonder if btc's notoriously bad privacy -- which its advocates occasionally loudly pretend to champion -- is more consciously-chosen than we're used to thinking?

In other words: if btc was as private as Monero, could it possibly have achieved the penetration it has, without the full-on opposition of the state? Has awareness of this tradeoff -- between privacy and courting clear and direct hostility from the government -- informed its development trajectory? What does this privacy tradeoff portend for its future?

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697 sats \ 1 reply \ @k00b 2 Dec 2023

We talked about this a little bit on this post.

I wouldn't have guessed that weak privacy is a feature and not a bug, strictly on the grounds of soothing regulators, but it seems so. It makes me wonder what it might mean if bitcoin had worse privacy. If bitcoin imparted no privacy benefit, the government's argument against bitcoin could only be economic. Would we be able to defend bitcoin on purely economic grounds? Would bitcoin be as valuable?

it may become untenable for governments to tax incomes as their primary source of revenue

Of all political issues, taxes are one of the weirdest. They are highly favored by governments and highly disfavored by citizens (at least when they themselves are subject to them). I don't know what to make of the pronounced mismatch but governments would do themselves a favor if they closed the gap some.

What does this privacy tradeoff portend for its future?

I'd wager governments will make every attempt to remove lawful private use of bitcoin. Bitcoin's weak privacy will make those attempts more likely to succeed too.

689 sats \ 0 replies \ @elvismercury OP 2 Dec 2023

We talked about this a little bit on this post.

Argh, I hate when I repeat myself. Although I guess it's a hazard of everything being connected to everything. Good call-out.

I'd wager governments will make every attempt to remove lawful private use of bitcoin. Bitcoin's weak privacy will make those attempts more likely to succeed too.

I recently stumbled on Cory Klippsten's framing: the race to prevent the war [1]. I think you're right, unfortunately; I'm trying to think of any elements of the race that could preclude it other than simple raw adoption.

[1] Looks like it's been linked on SN before (here and here) though discussion was minimal. Maybe worth another post sometime...

436 sats \ 29 replies \ @antic 2 Dec 2023

I used to be a huge privacy nut, but I’ve reached a balancing point where I’m also risk adverse to the downsides of anonymity. I wouldn’t want to risk a fat bitcoin address with anonymously obtained UTXO pollution that triggers a KYC blacklist/confiscation, which could poison my ability to use my own bitcoin later in a legal public market setting.

So in small, specific settings, anonymity is great. Maybe I don’t want it to be public that I bought a specific thing on the internet or locally (but both of those actions open up other risks such as location finding by the seller). But for regular day-to-day, I’ve come to terms with wanting the majority of my bitcoin to be legit and not spiced with red flags.

I played with monero about 5-6 years ago and found the privacy features to be so cumbersome that it wasn’t worth it. Not being able to even view the balance of a wallet without another special set of keys is way more burdensome than most people will ever want to manage—and if you want a small amount of anonymity, just Loop out some coins over lightning.

Simplest non-KYC path I’ve found is to buy BTC with Cash App, Lightning pay your own node, then loop out to an offline private address on-chain. You don’t have to make all of your BTC non-KYC to gain the benefits of privacy.

228 sats \ 22 replies \ @siggy47 2 Dec 2023

I understand your evolution, and I have similar feelings. Still, isn't this really accepting the end of bitcoin as a fungible asset? That's a big deal.

1126 sats \ 7 replies \ @elvismercury OP 2 Dec 2023

Fungibility seems to me to technologically determined -- if a money cannot be differentiated from its other units, then it's fungible. If it can be differentiated, then it will be, because people have all kinds of feelings on the issue of where it's been spent, and by who.

In other words, because it's technically possible for people / groups to have opinions about different UTXOs, they will have those opinions, and nothing can prevent them from having them.

Which would suggest that the best we can hope for is some kind of overwhelming cultural pressure to keep that inevitability in check, kind of like norms can racism or sexism socially inadmissible in the broader society, but obviously those things still happen.

Thoughts?

228 sats \ 6 replies \ @siggy47 2 Dec 2023

What you wrote is accurate, but then we must accept that bitcoin is inferior to gold, and even paper bank notes, when it comes to fungibility. Perhaps the only recourse is to use mixers, and, to quote a famous philosopher named @DarthCoin, "fuck the guvs."

920 sats \ 5 replies \ @elvismercury OP 2 Dec 2023

Mixers, and then hope the culture makes mixing so prevalent that preferences for 'clean' coins with good pedigrees becomes implausible; and that the ability of state actors to oppress based on that pedigree becomes minimal.

0 sats \ 4 replies \ @DarthCoin 2 Dec 2023

sir, did you finish reading ALL my guides?

Please try to pay this LN invoice and tell me if you can find the destination...

lnbc10u1pjkhyzkpp54xg0hgtp24h6mc0ce0llu3mxl57p86564pglk5vk86x0v3gqqt2qdqqcqzrcxqr8qlsp56qlgqxxfp5e2g2c5q2qdf24n09np4unfrnlmqkmv5us74vj3q7sq9qyyssq2r9zd7kda6g8cmpu6lh0hte9mentj0v7mcvy6glkngygdfe600qxkqf2f5ffumvvdatk5wzgmw6j49z6ee62hfkk8dpwggew7x6kntqpuykn79

173 sats \ 0 replies \ @antic 2 Dec 2023

^ this. Lightning is the most effective mixer/anonymous layer on Bitcoin. When you need anonymity, it’s there, and it works pretty damn well these days. Sure, there are issues with edges knowing their points on the route, but it’s good enough to mitigate anything but a very expensive to concoct NSA surveillance node network (that would be frequently bypassed anyway).

Besides, it’s much easier for a government to just demand records from merchants and get shipping info to hunt you down in meatspace than to trace lightning. We’ve reached the point of evolution where the privacy failure exists outside the bitcoin payment ecosystem.

0 sats \ 2 replies \ @elvismercury OP 3 Dec 2023

I tried, it expired :)

But point taken. I need to learn more about this aspect of LN. Well, I need to learn about all of it, but this in particular.

0 sats \ 1 reply \ @DarthCoin 3 Dec 2023

LOL after 4 h ?! hahaha, I never let my LN invoices to be valid after 1h. Read more here https://docs.zeusln.app/lsp/wrapped-invoices/

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399 sats \ 13 replies \ @antic 2 Dec 2023

How does that negatively affect Bitcoin fungibility? Lightning is effectively an anonymous payment layer and it maximizes fungibility by being able to send 1 sat. I would only use the loop technique if I wanted/needed a larger sum of BTC on chain to be anonymous, which is not even a need that’s surfaced yet.

Also, worth noting, I’m not in the camp that’s worried about hiding BTC to evade taxes. Ultimately, I think that’s a losing proposition if you are buying BTC and then trying to anonymize it. May work for local merchants like taking cash, but ultimately the government knows you bought some asset and then sent it somewhere.

31 sats \ 12 replies \ @siggy47 2 Dec 2023

Fungibility meaning "The property of a good or a commodity whereby individual units are capable of mutual substitution." In other words, the impossibility of having whitelisted and blacklisted bitcoin.

589 sats \ 11 replies \ @antic 2 Dec 2023

Ah, you mean the labeled UTXOs being the ruin of it. I think that will ultimately wash out. The government blacklisted Silk Road BTC, but then what? They confiscate and sell it to the market and remove the blacklisting because they washed it. The purpose of government blacklisting UTXOs is so they can catch people (and then steal the asset to sell it).

But, in the meantime, if you are operating on the dark market for UTXOs, you could get stuck holding that pre-government-cleansed blacklist UTXO.

639 sats \ 10 replies \ @siggy47 2 Dec 2023

My point is more basic. Bitcoin is money. Gold served as money for centuries. Part of the reason gold was good money was that it was fungible. If a government attempted to restrict a particular gold coin, the owner of that coin could just melt the coin into an unrecognizable lump that would be the same weight and value. That's fungibility. If we surrender that in bitcoin we are surrendering an important trait of good money. No government should have the ability to favor one type of the asset from another.

623 sats \ 1 reply \ @DarthCoin 2 Dec 2023

Bitcoin is money.

Exactly. Nothing else. People always forget that.

399 sats \ 0 replies \ @siggy47 2 Dec 2023

I talk and talk, and think about things from different angles, and then I just wind up agreeing with you. I should save time and energy.

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426 sats \ 7 replies \ @antic 2 Dec 2023

I’m not concerned about government or individual preferences because systems like Lightning exist to bypass preference.

For gold, people and governments absolutely have preferences and exercise them. That’s why American eagles have a premium over Canadian maples (even though Canadian maples have higher gold purity). Assaying gold is a nightmare and most people won’t trust a gold bar from China. Gold is barely fungible in practical terms.

Likewise, I may have a preference for $2 USD bills or classic Eisenhower dollar coins. Just because I have this preference doesn’t really mean that dollars are less fungible, just that I’ve put a premium on some forms of it.

This is inevitable to any asset that is not 100% obfuscated like monero, but I don’t think the value proposition of removing this ability to have format/source preferences is worth the trade-offs of a purely anonymous monetary system.

And, even anonymous systems like monero can be subject to preference overrides. A government could say that the only legal monero is accompanied by a Keybase.io signature linking your identity to the transaction…

0 sats \ 0 replies \ @yo2xncv0 26 Dec 2023

And, even anonymous systems like monero can be subject to preference overrides. A government could say that the only legal monero is accompanied by a Keybase.io signature linking your identity to the transaction…

That's why white market crypto usage makes little sense. Using a permissionless money (Bitcoin/Monero/etc) in a permissioned way defeats the entire purpose. And regulations/requirements on the white market are pretty much garunteed to become more onerous over time.

Bitcoin/Monero is inherently black market money.

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0 sats \ 5 replies \ @siggy47 2 Dec 2023

It's not an issue of preference. American Eagles and Maple Leafs are coins. You pay a premium for design- if they look pretty. The ugliest looking once ounce Krugerrand and a beautiful Eagle are the same value when melted down. You're discussing jewelry premium.

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0 sats \ 5 replies \ @yo2xncv0 26 Dec 2023

The fact that you're worried using Bitcoin privately could taint your coins speaks volumes about it's fungibility problem.

If you're buying Bitcoin on Cash App that isn't non-KYC (your identity is tied to a Bitcoin purchase, how much you bought, and when)...forward privacy with what you do after that is something different.

0 sats \ 4 replies \ @antic 26 Dec 2023

speaks volumes about it's fungibility problem.

this argument about fungibility is silly as there is literally nothing on the planet (or in digital space) that meets this requirement. Everything can be differentiated, controlled, and given special treatment.

0 sats \ 3 replies \ @yo2xncv0 27 Dec 2023

Would you agree that there are some things that make it much easier to distinguish between and value differently than others? The goal should be to make money as uniform as possible.

0 sats \ 2 replies \ @antic 27 Dec 2023

I agree there are some things that makes it easier to distinguish characteristics. The goal of making money as uniform as possible seems to only leave room for currencies like Monero--where you can't track the history or balances. But I don't see that existing within the framework of society in the next 20 years (regardless of whether that's an ideal goal). I think the on/off ramps for purely anonymous systems are going to close hard and those currencies are going to be worthless. Allowances will be made for bitcoin conveyed over lightning with the argument that they can track some on-chain things and ultimately, the NSA's big data profiling probably makes any effort to anonymize bitcoin a nothingburger at the state level. As a citizen, you might have the freedom to keep your neighbor from knowing you bought a sex doll online, but the supply chain records and government data pools will have that info. It's very hard to maintain anonymity and privacy and 99% of people don't care about either, so society will shape around making it harder and harder.

284 sats \ 1 reply \ @yo2xncv0 28 Dec 2023

Not necessarily Monero. Whatever comes to achieve that uniformity best because it greatly reduces friction on that dimension. There is already better tech available, but no/poor implementations of it. But of course that is only one of several ideal properties of money. Maybe it is impossible to excel in all these properties for p2p digital cash because some are mutually exclusive (privacy vs auditability)

Any white market adoption is less relevant imo. Because of increasing onerous regulation Bitcoin will be squeezed into black markets over time, and whatever usage allowed on white markets will be greatly limited and in a neutered form. White market acceptance might be nice to have, but is at odds with the whole point of Bitcoin: Permissionless money.

"White market trade, by definition, requires permission, and black market does not...Any person operating in the white market requires permission to do so. Bitcoin is therefore inherently a black market money."

While arguably easier for many, you don't need on/off ramps (and for some it is not even preferable (noKYC crowd) or possible to begin with (cash cultures/unbanked large populations of the world)). Off the top of my head you can always swap from other crypto, sell things, offer labor/services, or take advantage of jurisdictional arbitrage. I'm sure I'm missing more.

For sure agree that big data and NSA spying is a problem, but not insurmountable. For example, encrypted messengers and VPN services (yes, most suck) have become very popular as a direct result. USPS postal services deliver millions of illegal packages/letters (~16 billion just this holiday season). Even from within, these systems flail for control. Darknets couldn't do it without them. I suspect you don't think it is all hopeless either though, otherwise you wouldn't be bothering with Bitcoin.

Private p2p digital cash can only protect you on one side of a transaction. It's only part of the solution, but something that wasn't even possible before.

10 sats \ 0 replies \ @antic 28 Dec 2023

Fair enough. Time will tell as the global markets mature. I see a lot of countries dollarizing in the near future. Argentina next, then a cascade of others. And as they do this, they will look at El Salvador and in many cases dual implement BTC/LN. This is the real revolution: fixed supply, deflationary economics. Privacy is nice, but it’s not the main attraction.

426 sats \ 1 reply \ @021e1f393f 2 Dec 2023

Its ok if bitcoin forgets it has ever pretended to have some form of privacy, in israel they seized like 30 hamas bitcoin wallets, unstopable money until it touches centralized exchanges!, russia doesn't need go to after its protesters when they are protesting they just go after the event thanks to face recognition and put them in prison, just like how easily is to track bitcoin, we need to make bitcoin goverment complaint because otherwise how are we goikg to protect the usa treasury from tax avoiders and ilegal transactions that aren't using the usa goverment banking system, we want fiat and bitcoin to be coexistant so while the state can't stop unstopable money we want it to be able to surveil and make bitcoin the cbdc we feared, also we want bitcoin pools to be ofac complain, long live the american dollar.

228 sats \ 0 replies \ @siggy47 2 Dec 2023

I agree with your sarcastic take here. I don't think it's critical that the bitcoin base layer be private; its pseudonymous nature, security, auditability, and stability take primacy. But, there is no reason to assume layer 2 solutions won't achieve privacy, and I hope that happens someday. If limited privacy in the base layer soothes governments, so be it, but that shouldn't be a focus for future developers.

0 sats \ 1 reply \ @DarthCoin 2 Dec 2023

https://darthcoin.substack.com/p/bitcoin-and-privacy

0 sats \ 0 replies \ @yo2xncv0 26 Dec 2023

Your whole article is a masterpiece of mental gymnastics and irrelevant tangents

It's a public ledger bro, it can't be private, every transaction that occurs is 100% visible to anyone in the world. A two year old would understand that. You can't even be anonymous on Bitcoin. You can be psuedonymous at best if you're lucky.

Truth hurts. Wake up.