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August 03, 2013, 09:28:57 PM |
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Every time a bitcoin transaction combines multiple inputs to send to a single destination those addresses are 'grouped' and with relatively simple network analysis it is possible to highly correlate addresses and for all practical purposes they become 'one'.
ZeroCoin is one approach that attempts to hide this. But comes at a heavy validation cost and storage requirement. I would like to consider the implications of an alternative approach.
Suppose that we were to treat certain outputs like 'cash' and denominated them in something like 0.01, 0.05, 0.10, 0.20 BTC. When ever you use these outputs they are always part of a transaction with exactly 1 input and 1 output and the output address is always to a new address.
Of course, you could divided a 0.20 output into 4 0.05 outputs if you need to make change. Reversing the process compromises your identity.
Given these fixed denomination single-input/single-output transactions it becomes as impossible to track as cash. The only challenge is that to make payments to someone you must exchange one address per 'bill' and thus it becomes a bit more cumbersome to use without some tools to automate it.
There is also the issue of proximity in time that would still couple the outputs as they would all be included in the same block. This wouldn't be too big of a deal if everyone was doing transactions like this. There is also the challenge of transaction fees which would require an extra input which should in theory also be a fixed denomination.
This whole process would be very inefficient, but perhaps if only a small subset of denominations, perhaps multiples of 1 BTC were managed in this way and special wallet software developed, then users who cared about privacy could transact like this while others continue using the system as is.
Do you think this actually adds to your privacy in a meaningful way?
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