Since the release of sidechains alpha, confidential transactions[1] by Greg
Maxwell have show how they could greatly improve transaction privacy and
fungibility of bitcoin. Unfortunately without a hardfork or pegged
sidechain it was not easy to enable them in bitcoin.

The segregated witness[2] proposal by Pieter Wuille allows to reduce the
blockchain to a mere utxo changeset while putting all cryptographic proofs
(redeemscript/pubkeys/signatures) for the inputs into a witness part.
Segwit also allows upgradable scripting language. All can be done with a
soft fork.

We propose an upgrade to segwit to allow transactions to have both
witnessIns and witnessOuts.

We also propose 3 new transactions types: blinding, unblinding and
confidential. Valid blocks containing any of these new transactions MUST
also include a mandatory special output in their coinbase transaction and a
new special confidential base transaction.

The basic idea for confidential transaction is to use 0 value inputs and
outputs while having the encrypted amounts (petersen-commitment +
range-proof) in the witnessOut part. These transactions are valid under old
rules (but currently non-standard). For blinding, unblinding and miner fees
we use a single anyone-can-spend output (GCTXO) which will be updated in
every block containing confidential transactions.

Blinding transaction:
  Ins:
    All non-confidential inputs are valid
  Outs:
  - 0..N: (new confidential outputs)
    amount: 0
    scriptPubkey: OP_2 <0x{32-byte-hash-value}>
    witnessOut: <0x{petersen-commitment}> <0x{range-proof}>
  - last:
    amount: 0
    scriptPubkey: OP_RETURN OP_2 {blinding-fee-amount}
  Fee: Sum of the all inputs value
The last output's script is also a marker of the transaction being a
blinding tx. After the soft fork, a block is invalid if the miner claims
the fees for himself instead of putting it into a special coinbase output.


Coinbase transaction:
If the block contains blinding transactions, it MUST send the sum of all
their fees to a new output: GCTXO[coinbase]
The scriptPubkey does not really matter since it will be only spendable
under strict rules in the same block's confidential base transaction. Maybe
OP_TRUE.


Unblinding transaction:
  Ins:
    prev: CTXO[n]
    scriptSig: (empty)
    witnessIn: <signature> <0x{redeemscript}>
  Outs:
  - 0..N:
    amount: 0
  scriptPubkey: OP_RETURN OP_2 {amount-to-be-unblinded} {p2sh-destination}
    witnessOut: (empty)
  - last:
    amount: 0
    scriptPubkey: OP_RETURN OP_2 {unblinding-fee-amount}
  Fee: 0

This transaction remove removes the confidential outputs from the utxo set.
This outpoint itself is not spendable (it's OP_RETURN), but the same block
will contain a confidential base transaction created by the miner that will
satisfy the amount and p2sh-destination (refunded using GCTXO).
Confidential transaction:
  Ins:
  - 0..N:
    prev: CTXO[n]
    scriptSig: (empty)
    witnessIn: <signature> <0x{redeemscript}>
  Outs:
  - 0..N:
    amount: 0
    scriptPubkey: OP_2 <0x{32-byte-hash-value}>
    witnessOut: <0x{petersen-commitment}> <0x{range-proof}>
  - last:
    amount: 0
    scriptPubkey: OP_RETURN OP_2 {confidential-fee-amount}
  Fee: 0

All inputs and outputs and have amount 0 and are everyone can spend V2
segwit, thus valid under old rules. Transaction valid under new rules
obviously only if petersen commitment and range-proof in witnessOut valid.
Minerfee for this transaction is expressed as one extra output:


Confidential base transaction:
  Ins:
    GCTXO[last_block],
    GCTXO[coinbase]
  Outs:
    0: GCTXO[current_block]
    amount: {last_block + coinbase - unblindings}
    scriptPubkey: OP_TRUE
    1..N:
    amount/scriptPubkey: as requested by unblinding transactions in this
block
  Fee:
    Sum of all the explicit OP_RETURN OP_2 {...} expressed fees from
    confidential transactions in this block

This special transaction in last position in every block that contains at
least one of the new transaction types. Created by the miner of the block
and used to do the actual unblinding and redeeming transaction fees for all
confidential transactions.

There will always be only 1 GCTXO in the utxo set. This allows for full
accountability for 21 million bitcoin. Should a vulnerability in CT be
discovered all unconfidential bitcoins remain safe. Under these new rules,
a block is only valid if all amounts/commitments/range-proofs match. A a
miner trying use GCTXO other than allowed in the single confidential base
transaction
will be orphaned.

[1] https://people.xiph.org/~greg/confidential_values.txt
[2]
https://github.com/CodeShark/bips/blob/segwit/bip-codeshark-jl2012-segwit.mediawiki


Sorry for the form, this is just a quick draft of a thought I had today.
Please comment.

Felix Weis