Wouldn't you lose the ability to assume transactions in the blockchain are
verified as valid, since miners can't see the details of what is being
spent and how? I feel like this ability is bitcoin's greatest asset, and by
removing it you're creating an altcoin different enough to not be connected
to/supported by the main bitcoin project.

On Mon, Aug 8, 2016, 09:13 Tony Churyumoff via bitcoin-dev <
bitcoin-dev@lists.linuxfoundation.org> wrote:

> Hi Henning,
>
> 1. The fees are paid by the enclosing BTC transaction.
> 2. The hash is encoded into an OP_RETURN.
>
> > Regarding the blinding factor, I think you could just use HMAC.
> How exactly?
>
> Tony
>
>
> 2016-08-08 18:47 GMT+03:00 Henning Kopp <henning.kopp@uni-ulm.de>:
>
>> Hi Tony,
>>
>> I see some issues in your protocol.
>>
>> 1. How are mining fees handled?
>>
>> 2. Assume Alice sends Bob some Coins together with their history and
>> Bob checks that the history is correct. How does the hash of the txout
>> find its way into the blockchain?
>>
>> Regarding the blinding factor, I think you could just use HMAC.
>>
>> All the best
>> Henning
>>
>>
>> On Mon, Aug 08, 2016 at 06:30:21PM +0300, Tony Churyumoff via bitcoin-dev
>> wrote:
>> > This is a proposal about hiding the entire content of bitcoin
>> > transactions.  It goes farther than CoinJoin and ring signatures, which
>> > only obfuscate the transaction graph, and Confidential Transactions,
>> which
>> > only hide the amounts.
>> >
>> > The central idea of the proposed design is to hide the entire inputs and
>> > outputs, and publish only the hash of inputs and outputs in the
>> > blockchain.  The hash can be published as OP_RETURN.  The plaintext of
>> > inputs and outputs is sent directly to the payee via a private message,
>> and
>> > never goes into the blockchain.  The payee then calculates the hash and
>> > looks it up in the blockchain to verify that the hash was indeed
>> published
>> > by the payer.
>> >
>> > Since the plaintext of the transaction is not published to the public
>> > blockchain, all validation work has to be done only by the user who
>> > receives the payment.
>> >
>> > To protect against double-spends, the payer also has to publish another
>> > hash, which is the hash of the output being spent.  We’ll call this
>> hash *spend
>> > proof*.  Since the spend proof depends solely on the output being spent,
>> > any attempt to spend the same output again will produce exactly the same
>> > spend proof, and the payee will be able to see that, and will reject the
>> > payment.  If there are several outputs consumed by the same transaction,
>> > the payer has to publish several spend proofs.
>> >
>> > To prove that the outputs being spent are valid, the payer also has to
>> send
>> > the plaintexts of the earlier transaction(s) that produced them, then
>> the
>> > plaintexts of even earlier transactions that produced the outputs spent
>> in
>> > those transactions, and so on, up until the issue (similar to coinbase)
>> > transactions that created the initial private coins.  Each new owner of
>> the
>> > coin will have to store its entire history, and when he spends the
>> coin, he
>> > forwards the entire history to the next owner and extends it with his
>> own
>> > transaction.
>> >
>> > If we apply the existing bitcoin design that allows multiple inputs and
>> > multiple outputs per transaction, the history of ownership transfers
>> would
>> > grow exponentially.  Indeed, if we take any regular bitcoin output and
>> try
>> > to track its history back to coinbase, our history will branch every
>> time
>> > we see a transaction that has more than one input (which is not
>> uncommon).
>> > After such a transaction (remember, we are traveling back in time),
>> we’ll
>> > have to track two or more histories, for each respective input.  Those
>> > histories will branch again, and the total number of history entries
>> grows
>> > exponentially.  For example, if every transaction had exactly two
>> inputs,
>> > the size of history would grow as 2^N where N is the number of steps
>> back
>> > in history.
>> >
>> > To avoid such rapid growth of ownership history (which is not only
>> > inconvenient to move, but also exposes too much private information
>> about
>> > previous owners of all the contributing coins), we will require each
>> > private transaction to have exactly one input (i.e. to consume exactly
>> one
>> > previous output).  This means that when we track a coin’s history back
>> in
>> > time, it will no longer branch.  It will grow linearly with the number
>> of
>> > transfers of ownership.  If a user wants to combine several inputs, he
>> will
>> > have to send them as separate private transactions (technically, several
>> > OP_RETURNs, which can be included in a single regular bitcoin
>> transaction).
>> >
>> > Thus, we are now forbidding any coin merges but still allowing coin
>> > splits.  To avoid ultimate splitting into the dust, we will also require
>> > that all private coins be issued in one of a small number of
>> > denominations.  Only integer number of “banknotes” can be transferred,
>> the
>> > input and output amounts must therefore be divisible by the
>> denomination.
>> > For example, an input of amount 700, denomination 100, can be split into
>> > outputs 400 and 300, but not into 450 and 250.  To send a payment, the
>> > payer has to pick the unspent outputs of the highest denomination first,
>> > then the second highest, and so on, like we already do when we pay in
>> cash.
>> >
>> > With fixed denominations and one input per transaction, coin histories
>> > still grow, but only linearly, which should not be a concern in regard
>> to
>> > scalability given that all relevant computing resources still grow
>> > exponentially.  The histories need to be stored only by the current
>> owner
>> > of the coin, not every bitcoin node.  This is a fairer allocation of
>> > costs.  Regarding privacy, coin histories do expose private transactions
>> > (or rather parts thereof, since a typical payment will likely consist of
>> > several transactions due to one-input-per-transaction rule) of past coin
>> > owners to the future ones, and that exposure grows linearly with time,
>> but
>> > it is still much much better than having every transaction immediately
>> on
>> > the public blockchain.  Also, the value of this information for
>> potential
>> > adversaries arguably decreases with time.
>> >
>> > There is one technical nuance that I omitted above to avoid distraction.
>> >  Unlike regular bitcoin transactions, every output in a private payment
>> > must also include a blinding factor, which is just a random string.
>> When
>> > the output is spent, the corresponding spend proof will therefore
>> depend on
>> > this blinding factor (remember that spend proof is just a hash of the
>> > output).  Without a blinding factor, it would be feasible to pre-image
>> the
>> > spend proof and reveal the output being spent as the search space of all
>> > possible outputs is rather small.
>> >
>> > To issue the new private coin, one can burn regular BTC by sending it to
>> > one of several unspendable bitcoin addresses, one address per
>> denomination.
>> >  Burning BTC would entitle one to an equal amount of the new private
>> coin,
>> > let’s call it *black bitcoin*, or *BBC*.
>> >
>> > Then BBC would be transferred from user to user by:
>> > 1. creating a private transaction, which consists of one input and
>> several
>> > outputs;
>> > 2. storing the hash of the transaction and the spend proof of the
>> consumed
>> > output into the blockchain in an OP_RETURN (the sender pays the
>> > corresponding fees in regular BTC)
>> > 3. sending the transaction, together with the history leading to its
>> input,
>> > directly to the payee over a private communication channel.  The first
>> > entry of the history must be a bitcoin transaction that burned BTC to
>> issue
>> > an equal amount of BCC.
>> >
>> > To verify the payment, the payee:
>> > 1. makes sure that the amount of the input matches the sum of outputs,
>> and
>> > all are divisible by the denomination
>> > 2. calculates the hash of the private transaction
>> > 3. looks up an OP_RETURN that includes this hash and is signed by the
>> > payee.  If there is more than one, the one that comes in the earlier
>> block
>> > prevails.
>> > 4. calculates the spend proof and makes sure that it is included in the
>> > same OP_RETURN
>> > 5. makes sure the same spend proof is not included anywhere in the same
>> or
>> > earlier blocks (that is, the coin was not spent before).  Only
>> transactions
>> > by the same author are searched.
>> > 6. repeats the same steps for every entry in the history, except the
>> first
>> > entry, which should be a valid burning transaction.
>> >
>> > To facilitate exchange of private transaction data, the bitcoin network
>> > protocol can be extended with a new message type.  Unfortunately, it
>> lacks
>> > encryption, hence private payments are really private only when bitcoin
>> is
>> > used over tor.
>> >
>> > There are a few limitations that ought to be mentioned:
>> > 1. After user A sends a private payment to user B, user A will know what
>> > the spend proof is going to be when B decides to spend the coin.
>> >  Therefore, A will know when the coin was spent by B, but nothing more.
>> >  Neither the new owner of the coin, nor its future movements will be
>> known
>> > to A.
>> > 2. Over time, larger outputs will likely be split into many smaller
>> > outputs, whose amounts are not much greater than their denominations.
>> > You’ll have to combine more inputs to send the same amount.  When you
>> want
>> > to send a very large amount that is much greater than the highest
>> available
>> > denomination, you’ll have to send a lot of private transactions, your
>> > bitcoin transaction with so many OP_RETURNs will stand out, and their
>> > number will roughly indicate the total amount.  This kind of privacy
>> > leakage, however it applies to a small number of users, is easy to
>> avoid by
>> > using multiple addresses and storing a relatively small amount on each
>> > address.
>> > 3. Exchanges and large merchants will likely accumulate large coin
>> > histories.  Although fragmented, far from complete, and likely
>> outdated, it
>> > is still something to bear in mind.
>> >
>> > No hard or soft fork is required, BBC is just a separate privacy
>> preserving
>> > currency on top of bitcoin blockchain, and the same private keys and
>> > addresses are used for both BBC and the base currency BTC.  Every BCC
>> > transaction must be enclosed into by a small BTC transaction that stores
>> > the OP_RETURNs and pays for the fees.
>> >
>> > Are there any flaws in this design?
>> >
>> > Originally posted to BCT
>> https://bitcointalk.org/index.php?topic=1574508.0,
>> > but got no feedback so far, apparently everybody was consumed with
>> bitfinex
>> > drama and now mimblewimble.
>> >
>> > Tony
>>
>> > _______________________________________________
>> > bitcoin-dev mailing list
>> > bitcoin-dev@lists.linuxfoundation.org
>> > https://lists.linuxfoundation.org/mailman/listinfo/bitcoin-dev
>>
>>
>> --
>> Henning Kopp
>> Institute of Distributed Systems
>> Ulm University, Germany
>>
>> Office: O27 - 3402
>> Phone: +49 731 50-24138
>> Web: http://www.uni-ulm.de/in/vs/~kopp
>>
>
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