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README.md

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Basic Concepts

  • Smart Contracts are defined as programs that execute on a blockchain when certain conditions are met, automating agreement executions without intermediaries.
  • Decentralized Applications (dApps) build upon smart contracts, featuring a user-friendly front-end and a transparent, auditable back-end.
  • Tokens & Coins differentiate where coins serve as digital money, while tokens represent value or ownership in specific contexts.
    • Utility Tokens grant access to services, and Security Tokens signify asset ownership.
  • DeFi stands for Decentralized Finance, offering financial services without central authorities.
  • DEX and DAOs refer to Decentralized Exchange Platforms and Decentralized Autonomous Organizations, respectively.

Consensus Mechanisms

Consensus mechanisms ensure secure and agreed transaction validations on the blockchain:

  • Proof of Work (PoW) relies on computational power for transaction verification.
  • Proof of Stake (PoS) demands validators to hold a certain amount of tokens, reducing energy consumption compared to PoW.

Bitcoin Essentials

Transactions

Bitcoin transactions involve transferring funds between addresses. Transactions are validated through digital signatures, ensuring only the owner of the private key can initiate transfers.

Key Components:

  • Multisignature Transactions require multiple signatures to authorize a transaction.
  • Transactions consist of inputs (source of funds), outputs (destination), fees (paid to miners), and scripts (transaction rules).

Lightning Network

Aims to enhance Bitcoin's scalability by allowing multiple transactions within a channel, only broadcasting the final state to the blockchain.

Bitcoin Privacy Concerns

Privacy attacks, such as Common Input Ownership and UTXO Change Address Detection, exploit transaction patterns. Strategies like Mixers and CoinJoin improve anonymity by obscuring transaction links between users.

Acquiring Bitcoins Anonymously

Methods include cash trades, mining, and using mixers. CoinJoin mixes multiple transactions to complicate traceability, while PayJoin disguises CoinJoins as regular transactions for heightened privacy.

Bitcoin Privacy Atacks

Summary of Bitcoin Privacy Attacks

In the world of Bitcoin, the privacy of transactions and the anonymity of users are often subjects of concern. Here's a simplified overview of several common methods through which attackers can compromise Bitcoin privacy.

Common Input Ownership Assumption

It is generally rare for inputs from different users to be combined in a single transaction due to the complexity involved. Thus, two input addresses in the same transaction are often assumed to belong to the same owner.

UTXO Change Address Detection

A UTXO, or Unspent Transaction Output, must be entirely spent in a transaction. If only a part of it is sent to another address, the remainder goes to a new change address. Observers can assume this new address belongs to the sender, compromising privacy.

Example

To mitigate this, mixing services or using multiple addresses can help obscure ownership.

Social Networks & Forums Exposure

Users sometimes share their Bitcoin addresses online, making it easy to link the address to its owner.

Transaction Graph Analysis

Transactions can be visualized as graphs, revealing potential connections between users based on the flow of funds.

Unnecessary Input Heuristic (Optimal Change Heuristic)

This heuristic is based on analyzing transactions with multiple inputs and outputs to guess which output is the change returning to the sender.

Example

2 btc --> 4 btc
3 btc     1 btc

If adding more inputs makes the change output larger than any single input, it can confuse the heuristic.

Forced Address Reuse

Attackers may send small amounts to previously used addresses, hoping the recipient combines these with other inputs in future transactions, thereby linking addresses together.

Correct Wallet Behavior

Wallets should avoid using coins received on already used, empty addresses to prevent this privacy leak.

Other Blockchain Analysis Techniques

  • Exact Payment Amounts: Transactions without change are likely between two addresses owned by the same user.
  • Round Numbers: A round number in a transaction suggests it's a payment, with the non-round output likely being the change.
  • Wallet Fingerprinting: Different wallets have unique transaction creation patterns, allowing analysts to identify the software used and potentially the change address.
  • Amount & Timing Correlations: Disclosing transaction times or amounts can make transactions traceable.

Traffic Analysis

By monitoring network traffic, attackers can potentially link transactions or blocks to IP addresses, compromising user privacy. This is especially true if an entity operates many Bitcoin nodes, enhancing their ability to monitor transactions.

More

For a comprehensive list of privacy attacks and defenses, visit Bitcoin Privacy on Bitcoin Wiki.

Anonymous Bitcoin Transactions

Ways to Get Bitcoins Anonymously

  • Cash Transactions: Acquiring bitcoin through cash.
  • Cash Alternatives: Purchasing gift cards and exchanging them online for bitcoin.
  • Mining: The most private method to earn bitcoins is through mining, especially when done alone because mining pools may know the miner's IP address. Mining Pools Information
  • Theft: Theoretically, stealing bitcoin could be another method to acquire it anonymously, although it's illegal and not recommended.

Mixing Services

By using a mixing service, a user can send bitcoins and receive different bitcoins in return, which makes tracing the original owner difficult. Yet, this requires trust in the service not to keep logs and to actually return the bitcoins. Alternative mixing options include Bitcoin casinos.

CoinJoin

CoinJoin merges multiple transactions from different users into one, complicating the process for anyone trying to match inputs with outputs. Despite its effectiveness, transactions with unique input and output sizes can still potentially be traced.

Example transactions that may have used CoinJoin include 402d3e1df685d1fdf82f36b220079c1bf44db227df2d676625ebcbee3f6cb22a and 85378815f6ee170aa8c26694ee2df42b99cff7fa9357f073c1192fff1f540238.

For more information, visit CoinJoin. For a similar service on Ethereum, check out Tornado Cash, which anonymizes transactions with funds from miners.

PayJoin

A variant of CoinJoin, PayJoin (or P2EP), disguises the transaction among two parties (e.g., a customer and a merchant) as a regular transaction, without the distinctive equal outputs characteristic of CoinJoin. This makes it extremely hard to detect and could invalidate the common-input-ownership heuristic used by transaction surveillance entities.

2 btc --> 3 btc
5 btc     4 btc

Transactions like the above could be PayJoin, enhancing privacy while remaining indistinguishable from standard bitcoin transactions.

The utilization of PayJoin could significantly disrupt traditional surveillance methods, making it a promising development in the pursuit of transactional privacy.

Best Practices for Privacy in Cryptocurrencies

Wallet Synchronization Techniques

To maintain privacy and security, synchronizing wallets with the blockchain is crucial. Two methods stand out:

  • Full node: By downloading the entire blockchain, a full node ensures maximum privacy. All transactions ever made are stored locally, making it impossible for adversaries to identify which transactions or addresses the user is interested in.
  • Client-side block filtering: This method involves creating filters for every block in the blockchain, allowing wallets to identify relevant transactions without exposing specific interests to network observers. Lightweight wallets download these filters, only fetching full blocks when a match with the user's addresses is found.

Utilizing Tor for Anonymity

Given that Bitcoin operates on a peer-to-peer network, using Tor is recommended to mask your IP address, enhancing privacy when interacting with the network.

Preventing Address Reuse

To safeguard privacy, it's vital to use a new address for every transaction. Reusing addresses can compromise privacy by linking transactions to the same entity. Modern wallets discourage address reuse through their design.

Strategies for Transaction Privacy

  • Multiple transactions: Splitting a payment into several transactions can obscure the transaction amount, thwarting privacy attacks.
  • Change avoidance: Opting for transactions that don't require change outputs enhances privacy by disrupting change detection methods.
  • Multiple change outputs: If avoiding change isn't feasible, generating multiple change outputs can still improve privacy.

Monero: A Beacon of Anonymity

Monero addresses the need for absolute anonymity in digital transactions, setting a high standard for privacy.

Ethereum: Gas and Transactions

Understanding Gas

Gas measures the computational effort needed to execute operations on Ethereum, priced in gwei. For example, a transaction costing 2,310,000 gwei (or 0.00231 ETH) involves a gas limit and a base fee, with a tip to incentivize miners. Users can set a max fee to ensure they don't overpay, with the excess refunded.

Executing Transactions

Transactions in Ethereum involve a sender and a recipient, which can be either user or smart contract addresses. They require a fee and must be mined. Essential information in a transaction includes the recipient, sender's signature, value, optional data, gas limit, and fees. Notably, the sender's address is deduced from the signature, eliminating the need for it in the transaction data.

These practices and mechanisms are foundational for anyone looking to engage with cryptocurrencies while prioritizing privacy and security.

References

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