This is the part where I get lost. How does this improve privacy? If I have to specify which addresses are mine in this block, to get the tx data, the node learns which addresses are mine at this point, no?

Also, are you saying each block needs a record of the entire UTXO set at the time the block was made? I'm not sure how to parse this sentence.

Could you please walk me through precisely what happens and what data is sent, once I learn that a block has interesting data in it?