Two proposals for the further development of the Bitcoin network could greatly increase privacy for bitcoin users. Two upcoming Bitcoin Improvement Proposals (BIP) can increase the usability of smart contracts on the Bitcoin blockchain, while also adding increased privacy. The current Bitcoin blockchain is not so private as some might think.
Currently anybody can search the Bitcoin blockchain for wallets and addresses, and perhaps tie them together. This allowed police to find all kinds of criminals, especially when these criminals use bitcoin to make online purchases or cash out their bitcoins for money. However, bitcoin is still the most preferred cryptocurrency on the dark web.
Bitcoin and blockchain technology are complicated technologies, especially in relationship with privacy. If you own a bitcoin wallet, everybody can see how much bitcoin you have received and spend. As long as bitcoin users don't transfer value from their bitcoin wallet to a bank account, they can't be identified. You understand, the reality of privacy with Bitcoin is rather complex.
There are wallets, like Wasabi Wallet, that allow user to mix their bitcoin and create more anonymity. However, there's enough room for improvement. That's where the two upcoming Bitcoin Improvement Proposals come in.
The Schnorr proposal will increase privacy and decrease costs for the use of the multisignature security protocol. Taproot is the other proposal. This allows more smart contract functionalities without creating more privacy issues.
With these two proposal there would be less transaction information on the blockchain. For example, a one-on-one transaction would look exactly the same from a bunch of transactions on the Lightning Network. As a result you can no longer see on the blockchain which Bitcoin wallet software made the transaction.
On top of that transactions will all be tied together under the same banner. This way there's no way to point out the difference between a smart contract transaction or a one-on-one transaction of value. All these transactions are in the same anonymity set. As a result it's much easier to camouflage activity on the Bitcoin network. Transaction inputs and outputs no longer link directly together. This creates privacy.
Activating these proposals on the Bitcoin network is not a reality yet. First developers need to review the proposals, after which they need to be developed and tested. After that the proposals need to be activated by the network and then adopted by users. There's no time frame yet, but likely it will take a while.
Keep in mind that all these changes can cause all kinds of turmoil. When the Bitcoin developer community had a disagreement about introducing Segwit, it caused a lot of commotion and uncertainty. Bitcoin almost became a game of thrones, so to say. That's the type of uncertainty and disagreement that caused the Bitcoin Cash hard fork in the first place.
Even with Taproot and Schnorr in place, wallets and other software need to embrace it too. Without the tools and software to use it, the technology itself is of course useless. We are talking about privacy on the Bitcoin blockchain, but how many people are really looking for total privacy?
In October people used existing wallets for 52% of the transactions. Bitcoin users have the ability to create a new wallet for every incoming transaction. This would make it more difficult to trace money around the globe. However, in more than half of the transfers people tend to use older wallets, according to data from OTX. This number has been rising since December 2017, when it was 41%. It looks like bitcoin users aren't educated enough or simply can't be bothered to protect their privacy.
