Taproot as a threat to privacy: why the Bitcoin update is criticized?

On January 14, the 0.21.0 version of Bitcoin Core, the most popular client of the Bitcoin network, was released. In addition to various innovations and improvements, it includes the final version of the Schnorr/Taproot code, an update designed to increase the privacy and scalability of the network, as well as the interchangeability of coins.

The immediate timing of the decision activation has not yet been determined and there is no activation logic required to run. In the coming months, developers may include it in one of the upcoming interim releases of Bitcoin Core.

Before Taproot was included in Bitcoin Core, its code was studied for several years by more than 150 developers, and as of the end of December almost all major mining pools, or more than 90% of the hash rate, were signaled in favor of the upgrade.

For Bitcoin, whose history has known many differences of opinion on technical issues, this is quite a rare phenomenon. The developers demonstrated unity in their views after the recent statements suggesting that Taproot not only does not increase the privacy of transactions but rather reduces it.

Arguments against Taproot

There have listed the reasons why Taproot threatens the privacy of Bitcoin in a document published in late November 2020 by BlockChair’s CEO Nikita Zhavoronkov.

As you know, the nods deployed in the network of Bitcoin track the outlets through which you can send funds when making transactions. They are known as unspent transaction outputs (UTXO). For example, Alice has two Bitcoins, one of which she wants to send to Bob. In the transaction, the UTXO is divided, where the coins are located: 1 BTC goes to Bob, another 1 BTC is sent back to Alice at the so-called change address.

Taproot activates new rules (scripts) that are outwardly different from existing scripts like the transaction signature mechanism using private keys or UTXO scripts.

Coins locked in such scripts will be allocated among the rest, which will make it easier for analytical companies to determine the recipients of funds.

As an example, one of the experts cites bech32, the native format of SegWit addresses (beginning with “bc1”). If the recipient upgrades to SegWit and uses this format, the sender’s wallet continues to create the same type of addresses as originally (starting with “1”).

It can now be established that 1BitcoinAddress11111 and 1BitcoinAddress33333333333 belong to the same person (sender). This allows address clustering and carries a potential risk to both the sender and the recipient.

Taproot will add P2TR, and the technology will only be effective if users and exchanges accept 100 percent.

What does Bitcoin core say?

Arguments were almost instantly met with fierce criticism from the developers of Bitcoin Core, primarily from the author of the technology Gregory Maxwell.

He wonders why experts are not bothered by privacy issues in cases with hard fork “scam coins” or why they see a threat to Bitcoin privacy where another type of scripts is used in only 10% of transactions but do not see it in altcoins, the number of transactions which are significantly less (as in the case of Bitcoin Cash).

Maxwell noted that every new use of scripts and every new policy on multi-subscription technology has a negative impact on user privacy. Moreover, he said, users can put their own privacy at risk.

“Taproot improves this situation significantly, but because it is itself a new feature, the level of user privacy will be small until its use becomes ubiquitous. This is something that has always been discussed in the taproot process and has led to a number of decisions regarding its design,” he added.

Maxwell also considers it extremely ironic that Zhavoronkov has come under criticism for privacy issues, while his own website is centralized and can store users’ private data without their knowledge.

Blockchair’s developer response was not long in coming:

“I don’t want to discuss anything on the censored subreddit, what’s the point? Twitter is neutral in this regard, so I prefer it,” Zhavoronkov replied, noting that a few months ago Blockchair introduced a tool to assess the level of transaction privacy on the bitcoin network, while for Bitcoin Cash such an option is not yet available.

In the future, Javoronkov came into a deeper discussion with Maxwell, declaring his desire to protect the interests of ordinary users engaged in simple transactions, rather than geeks, fixated on complex and inaccessible to a wide range of technologies like Lightning Network.

But, according to Maxwell, he has not received detailed answers to his questions, and the presentation itself consists of unsubstantiated and false statements and is an example of a commercial conflict of interest.

Long-term perspective

According to official documents, Taproot, combined with Schnorr’s signatures, expands the possibilities of multi-signature technology by increasing the group of types of transactions that can be allowed to give visibility to standard. These include closing channels in the Lightning Network and atomic swaps in addition to P2PKH and P2WPKH schemes, i.e. single spending.

Peter Velle, who in October 2020 merged Schnorr’s signature, Taproot, and Tapscript technology into one proposal, refrained from extensive discussions about criticism of Zhavoronkov, confining himself to retweeting the tread of German developer Lightning Network @sebx2a. It says the allegations about Taproot’s negative impact on privacy are an attempt to sow the seeds of doubt about technology.

In short, Taproot can indeed lead to loss of privacy, but on a small scale and only under certain conditions and specific attacks. In most cases, and as a consequence in general, Taproot is definitely a plus, both about privacy and the flexibility of smart contracts.

The hysteria of Taproot’s opponents and the conspiracy theories, can be seen on the slides in Zhavoronkov’s presentation, are not only late for the discussion, but also do not have to construct.

If users still have doubts, it is better to delve into the details and draw their own conclusions. And if there is no such possibility – to seek advice from experts.

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