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Privacy

Bitcoin is pseudonymous, not anonymous. Every transaction is publicly recorded on the blockchain. Without deliberate privacy practices, it's often possible to link transactions to real-world identities. Understanding privacy is essential for every Bitcoin developer.

Why Privacy Matters​

  • Fungibility — If coins can be traced and "tainted," Bitcoin loses fungibility (all coins should be equal)
  • Personal safety — Public balances can make users targets for theft
  • Business confidentiality — Companies don't want competitors seeing their transactions
  • Financial freedom — Surveillance-resistant money is a core Bitcoin value

On-Chain Privacy Threats​

Common Heuristics Used in Chain Analysis​

HeuristicHow It WorksCountermeasure
Address reuseSame address used multiple times links transactionsGenerate a new address for every receive
Common input ownershipInputs in the same transaction likely belong to the same walletCoinJoin, PayJoin
Change detectionIdentify which output is change vs. paymentAvoid round amounts, use same address type
Timing analysisTransaction timing correlates with user activityDelayed broadcasting
Amount correlationMatch input/output amounts across transactionsBreak amounts with CoinJoin
Dust attacksSmall UTXOs sent to track spendingCoin control, ignore dust

Privacy Techniques​

Coin Control​

Coin control lets users choose which UTXOs to spend in a transaction, preventing unwanted linkage:

# List UTXOs with labels
bitcoin-cli listunspent

# Send using specific UTXOs
bitcoin-cli -named send outputs='{"bc1q...": 0.5}' \
  options='{"inputs": [{"txid": "abc...", "vout": 0}]}'

Every wallet that handles privacy should implement coin control. Users need to decide which coins to combine in a transaction.

CoinJoin​

CoinJoin combines multiple users' transactions into one, breaking the link between inputs and outputs:

Traditional transaction:
  Alice (1 BTC) → Bob (0.8 BTC) + Alice change (0.2 BTC)

CoinJoin:
  Alice (1 BTC)  ┐     ┌ ? (0.5 BTC)
  Bob (0.5 BTC)  ├─tx─→├ ? (0.5 BTC)
  Carol (0.5 BTC)┘     ├ ? (0.5 BTC)
                        └ ? (0.5 BTC)

With equal-sized outputs, an observer can't determine which input funded which output.

Implementations:

PayJoin (BIP-78)​

PayJoin involves the receiver contributing an input to the transaction, breaking the common-input-ownership heuristic:

Normal payment:
  Sender input → Receiver output + Sender change

PayJoin:
  Sender input + Receiver input → Receiver output + Sender change

To an observer, it looks like all inputs belong to the sender — which they don't. This improves privacy for both parties.

Network-Level Privacy​

Tor​

Running Bitcoin Core over Tor hides your IP address from peers:

# bitcoin.conf
proxy=127.0.0.1:9050
listen=1
onlynet=onion

Dandelion++ (BIP-156)​

Dandelion++ changes how transactions propagate to prevent linking a transaction to the originating IP:

  1. Stem phase — Transaction is relayed through a random path of nodes (one at a time)
  2. Fluff phase — Transaction is broadcast normally to the full network

This makes it difficult for spy nodes to determine which node originated a transaction.

Silent Payments (BIP-352)​

Silent Payments allow receiving to a static public identifier without address reuse:

  • Receiver publishes a silent payment address (static, reusable)
  • Sender derives a unique on-chain address using ECDH
  • Each payment goes to a different address on-chain
  • No interaction between sender and receiver required

This solves the address reuse problem without requiring a server or interaction.

Privacy for Developers​

When building Bitcoin applications:

  • Default to privacy — Generate new addresses by default, never reuse
  • Implement coin control — Let users choose which UTXOs to spend
  • Avoid unnecessary data collection — Don't log IP addresses with transactions
  • Use your own node — Don't leak user addresses to third-party APIs
  • Support Tor — Allow users to connect via Tor
  • Label UTXOs — Help users understand the provenance of their coins
  • Consider PayJoin — Implement BIP-78 for receiving payments