bitcoin technology is impressive for the number of fundamental money-related problems it solves. One advantage of bitcoin that is often highlighted is that it allows Final settlement of transactions.
Final settlement means that once a transaction has been mined and enough subsequent transactions have been mined, it would take an infeasible amount of energy to go back and reverse the original transaction. There is a well-known guideline that states that a bitcoin transaction can be considered final if five additional blocks are then added to the time chain after the block containing the transaction.
(For technical readers: At the current mining hash rate of about 585 exohashes per second, the total work required to reorganize a block 6 blocks deep in the time chain would require about 2 million exohashes, which would demand about 63 thousand terajoules of energy. This is the equivalent of a thousand Hiroshima-sized atomic bombs.)
The conventional wisdom is that after these six confirmations, the transaction is practically set in stone. However, this view is simplistic and fails to take into account one crucial factor: privacy.
The illusion of purpose
In a revealing blog post titled “There is no purpose in payments,“Patrick McKenzie presents a compelling argument that challenges the common understanding of the finality of transactions. He argues that finality is not an absolute concept, but rather a “techno-socio-legal construct.” In other words, the finality of a transaction depends on an interplay of technical capabilities, social norms, and legal frameworks.
The conventional wisdom about six confirmations only takes into account the technological aspect of the transaction. The true purpose remains elusive if a hegemon, such as a powerful government, can identify the parties involved in a transaction and exert coercive force on them to reverse it.
While Bitcoiners often put their faith in immutable laws of mathematics and physics to ensure transaction finality, McKenzie's observation is that the sociolegal dimension of finality can and does trump technological finality. McKenzie sums up the idea this way: “If you and the U.S. federal government disagree about whether a transaction is final, you're wrong.”
The technological dimension of bitcoin's finality should not be underestimated. Unlike all forms of money that preceded it, bitcoin allows its holder to resist coercion by destroying or refusing to divulge a secret key, thereby rendering the funds inaccessible forever. In contrast, all other forms of money can be unilaterally confiscated through physical seizure or the intervention of third-party custodians.
While this technologically-purpose “nuclear option” exists with bitcoin, it would only be invoked in extreme circumstances. And even then, invoking it effectively destroys the bitcoin involved in the transaction, meaning the payer’s transaction will be final, but the payee will lose access to the funds permanently. This is, in essence, a kind of reversal, at least for one side of the transaction.
However, this is beside the point. The vast majority of bitcoin transactions… bitcoin-hits-one-billion-transactions”>Recently surpassed one billion in number – remain vulnerable to reversal through conventional legal and political coercion. bitcoin’s innovation in terms of its technological purpose is significant, but it does not negate the influence of existing power structures on most real-world transactions.
Enter Privacy: The Missing Link
This is where privacy comes into play. bitcoin privacy is often discussed in the context of censorship resistance and permissionless transactions. However, privacy is also a fundamental requirement for achieving final settlement.
When transactions are sufficiently private, centralized authorities lose their influence over the parties involved. Without the ability to identify participants, there is no individual to whom a socio-legal apparatus can turn to force a transaction to be reversed.
Despite its importance, privacy in bitcoin transactions has often been criticized for its lack of privacy. The transparent nature of the time chain means that all transactions are publicly visible, and in most cases, it is trivial to link transactions to real-world identities. This leads to a disturbing conclusion: almost all bitcoin transactions are reversible!
Promising Technologies for bitcoin Privacy
The lack of strong privacy in bitcoin is being addressed by several solutions that offer greater privacy and move the bitcoin network in the direction of true final settlement.
Fedimints, for example, are community-operated escrow solutions that combine the privacy benefits of CoinJoin-like mixing with the scalability of the Lightning Network. They use blind signatures and Chaumian e-money principles to provide strong privacy guarantees for users within trusted communities. This week, Fedi, a leading innovator in Fedimint technology, launched a full-featured app that anyone can use to create a federated Mint within their own community.
While Fedimints offer increased privacy for transactions within a community of users, they provide limited privacy for on-chain transactions. They also do not guarantee finality in the same way that on-chain bitcoin transactions do, as they rely on the trustworthiness of the community's operators.
The Lightning Network, while primarily designed to scale bitcoin transaction volume beyond what would be possible with on-chain transactions, also offers privacy benefits. By moving payments off-chain, Lightning reduces the amount of information visible on the public time chain. Adding onion routing to Lightning payments further improves privacy. However, Lightning presents an interesting trade-off between privacy and finality. Users hide their identities, but their funds are left exposed to potential loss or theft by channel operators or counterparties.
Silent payments are one of the most promising proposals for improving both the privacy and finality of bitcoin transactions. An improvement to the protocol called GDP 352 Silent Payments aims to improve transaction privacy by allowing users to receive payments without revealing their public addresses on the timechain. By using a combination of stealth addresses and key derivation techniques, Silent Payments makes it significantly more difficult to trace the flow of funds.
The power of Silent Payments lies in their ability to provide strong privacy guarantees while maintaining the finality properties of bitcoin transactions on-chain. Unlike off-chain solutions, Silent Payments operate directly on the bitcoin timechain, ensuring that transactions benefit from bitcoin’s robust “technological settlement” model. This approach could significantly improve the fungibility of coins and resist attempts to reverse transactions.
Making silent payments a standard feature of bitcoin wallets will be a challenge, as they affect the size of the time chain and cannot be implemented in lightweight clients. However, silent payments are the most promising way to improve settlement finality proposed so far.
The way forward
To build a monetary network that offers true final settlement, the bitcoin community must prioritize privacy. This includes introducing stronger privacy features at the protocol level, such as Silent Payments, and creating user-friendly privacy tools that make private transactions the default option, not the exception. Education plays a crucial role in this process, helping users understand the importance of privacy for the long-term security of the bitcoins they hold.
While bitcoin’s technical properties provide a solid foundation for final settlement, it is privacy that truly cements it. Without sufficient privacy, even the most energy-intensive consensus mechanism can be undermined by social, legal, or political pressures. Only when bitcoin transactions are private can bitcoin reach its full potential as a revolutionary new form of money with genuine, irreversible final settlement.
This is a guest post by Dave Birnbaum. The views expressed are solely his own and do not necessarily reflect those of btc Inc or bitcoin Magazine.