Bitcoin mining machines operate at a mining facility by Bitmain Technologies Ltd. in Ordos, Inner … [+] Mongolia, China, on Friday, Aug. 11, 2017. (Qilai Shen/Bloomberg)
© 2017 Bloomberg Finance LP
The CEO of one of the top three Bitcoin mining pools recently stated that Bitcoin needs better privacy in order to avoid a potential regulatory clampdown. The comments were made by Poolin CEO Kevin Pan in an interview with Bitcoin Magazine.
While Poolin is barely a year old, it already accounts for a significant portion of the total Bitcoin network hashrate. The mining pool was created by Pan, COO Fa Zhu, and CTO Tianzhao Li, all of whom were previously at the Bitcoin mining giant Bitmain’s subsidiary BTC.com.
Bitcoin’s Need for Better Privacy
Although those who haven’t researched Bitcoin deeply often think it is some sort of anonymous online currency, the reality is Bitcoin’s privacy features are quite poor. Over the years, this lack of privacy has been pointed out as a serious issue in terms of the cryptocurrency’s fungibility, which is a key property of money.
Developers have proposed a wide variety of Bitcoin privacy improvements over the years, but many of these proposals come with trade-offs in the areas of scalability, security, and other important areas. For example, the introduction of Confidential Transactions, which masks the amounts involved in Bitcoin transactions, at the base protocol level could weaken the guarantees associated with the public verifiability of Bitcoin’s current supply.
While scaling is often brought up as the most pressing issue facing Bitcoin today (just look at the block size wars from previous years), Pan views privacy as the most important area of development for the crypto asset.
“The real problem with Bitcoin may be privacy,” Pan told Bitcoin Magazine. “There is no other big question if the privacy issue is solved.”
Pan went on to describe the normal issues surrounding fungibility that are often discussed in Bitcoin circles, but then the Poolin CEO brought up another problem that is often overlooked by those who promote Bitcoin’s usefulness for censorship-resistant transactions.
“What is more troublesome now is if government or law enforcement departments begin to create a blacklist of transaction addresses, it will make certain transactions unable to be packaged,” said Pan. “In fact, these can be done. But if there is privacy, you can’t know who the address belongs to, and you can’t determine how much the amount is, and there is no way to control the currency system. So for me, Bitcoin is basically no problem if the issue of privacy can be solved.”
The problem Pan brought up here has to do with government entities potentially telling Bitcoin miners to block transactions coming from or going to specific addresses. A Bitcoin user’s money could be effectively frozen if 51% of miners decide not to process transactions originating from that user’s known Bitcoin addresses. With less than 51% support from miners, these transactions would simply be slowed down rather than completely blocked.
This issue raised by Pan is closely related to the issue of Bitcoin mining centralization, as this sort of censorship attack is only possible if government officials are able to identify and coerce 51% of the network hashrate. Progress is also being made on this greater issue of mining centralization. New mining protocols can further decentralize the transaction selection process, and more mining centers, such as the ones recently revealed by Bitcoin technology startup Blockstream, are popping up in jurisdictions other than China.
Transaction censorship is also easy to enforce via centralized services built on top of the Bitcoin network, such as exchanges, where the vast majority of Bitcoin activity takes place.
Taproot, which is an in-development improvement for Bitcoin, is expected to enable vast improvements to the current level of privacy offered to the cryptocurrency’s users. For now, there are wallets like Wasabi Wallet and Samourai Wallet available for those who desire a higher degree of privacy.
Pan also mentioned that the privacy issue he brought up does not exist for some experimental altcoins, specifically Monero and Grin. It’s possible that some of the features associated with these privacy-conscious altcoins will eventually find their way into Bitcoin.
In terms of other potential issues facing Bitcoin, two of the developers behind key Bitcoin software recently shared two of the biggest threats that face the digital currency.