Hey Chris,

Excellent write-up. I learned a few new things while reading this
(particularly how to overcome the heuristics for address reuse and address
types), so thank you for that.

I have a few thoughts about how what you wrote relates to Succinct Atomic
Swaps (SAS)[0]. Perhaps it's useful.

>For a much greater anonymity set we can use 2-party ECDSA to create 2-of-2
multisignature addresses that look the same as regular single-signature
addresses

This may perhaps be counter-intuitive, but SAS doesn't actually require
multisig for one of the two outputs, so a single key will suffice. ECDSA is
a signing algorithm that doesn't support single key multisig (at least not
without 2p-ECDSA), but notice how for the non-timelocked SAS output we
never actually have to sign anything together with the other party. We swap
one of the two keys, and the final owner will create a signature completely
on their own. No multisig required, which means we can simply use MuSig,
even today without Schnorr.

Of course the other output will still have to be a 2-of-2, for which you
rightly note 2p-ECDSA could be considered. It may also be interesting to
combine a swap with the opening of a Lightning channel. E.g. Alice and Bob
want to open a channel with 1 BTC each, but Alice funds it in her entirety
with 2 BTC, and Bob gives 1 BTC to Alice in a swap. This makes it difficult
to tell Bob entered the Lightning Network, especially if the channel is
opened in a state that isn't perfectly balanced. And Alice will gain an
uncorrelated single key output.

As a side note, we could use the same MuSig observation on 2-of-2 outputs
that need multisig by turning the script into (A & B) OR MuSig(A,B), which
would shave off quite a few bytes by allowing single sig spending once the
private key is handed over, but this would also make the output stick out
like a sore thumb... Only useful if privacy is not a concern.

>=== Multi-transaction CoinSwaps to avoid amount correlation ===

This can apply cleanly to SAS, and can even be done without passing on any
extra secrets by generating a sharedSecret (Diffie-Hellman key exchange).

Non-timelocked:
CoinSwap AddressB = aliceSecret + bobSecret
CoinSwap AddressC = aliceSecret + bobSecret + hash(sharedSecret,0)*G
CoinSwap AddressD  = aliceSecret + bobSecret + hash(sharedSecret,1)*G

The above is MuSig compatible (single key outputs), there are no timelocks
to worry about, and the addresses cannot be linked on-chain.

>they would still need to watch the chain and respond in case a
hash-time-locked contract transaction is broadcasted

Small detail, but it should be noted that this would require the atomic
swap to be set up in a specific way with relative timelocks.

>=== PayJoin with CoinSwap ===

While it's probably clear how to do it on the timelocked side of SAS, I
believe PayJoin can also be applied to the non-timelocked side. This does
require adding a transaction that undoes the PayJoin in case the swap gets
aborted, which means MuSig can't be used. Everything else stays the same:
only one tx if successful, and no timelock (= instant settlement). I can
explain it in detail, if it happens to catch your interest.

Cheers,
Ruben


[0]  Succinct Atomic Swaps (SAS)
https://lists.linuxfoundation.org/pipermail/bitcoin-dev/2020-May/017846.html

On Mon, May 25, 2020 at 3:21 PM Chris Belcher via bitcoin-dev <
bitcoin-dev@lists.linuxfoundation.org> wrote:

> === Abstract ===
>
> Imagine a future where a user Alice has bitcoins and wants to send them
> with maximal privacy, so she creates a special kind of transaction. For
> anyone looking at the blockchain her transaction appears completely
> normal with her coins seemingly going from address A to address B. But
> in reality her coins end up in address Z which is entirely unconnected
> to either A or B.
>
> Now imagine another user, Carol, who isn't too bothered by privacy and
> sends her bitcoin using a regular wallet which exists today. But because
> Carol's transaction looks exactly the same as Alice's, anybody analyzing
> the blockchain must now deal with the possibility that Carol's
> transaction actually sent her coins to a totally unconnected address. So
> Carol's privacy is improved even though she didn't change her behaviour,
> and perhaps had never even heard of this software.
>
> In a world where advertisers, social media and other companies want to
> collect all of Alice's and Carol's data, such privacy improvement would
> be incredibly valuable. And also the doubt added to every transaction
> would greatly boost the fungibility of bitcoin and so make it a better
> form of money.
>
> This undetectable privacy can be developed today by implementing
> CoinSwap, although by itself that isn't enough. There must be many
> building blocks which together make a good system. The software could be
> standalone as a kind of bitcoin mixing app, but it could also be a
> library that existing wallets can implement allowing their users to send
> Bitcoin transactions with much greater privacy.
>
> == CoinSwap ==
>
> Like CoinJoin, CoinSwap was invented in 2013 by Greg Maxwell[1]. Unlike
> CoinJoin it is relatively complicated to implement and so far has not
> been deployed. But the idea holds great promise, and fixes many of the
> problems of some kinds of CoinJoins. CoinSwap is the next step for
> on-chain bitcoin privacy.
>
> CoinSwap is a way of trading one coin for another coin in a
> non-custodial way. It is closely related to the idea of an atomic swap.
> Alice and Bob can trade coins with each other by first sending to a
> CoinSwap address and having those coins then sent to Bob:
>
>     Alice's Address 1 ----> CoinSwap Address 1 ----> Bob's Address 1
>
> An entirely separate set of transactions gives Bob's coins to Alice in
> return:
>
>     Bob's Address 2 ----> CoinSwap Address 2 ----> Alice's Address 2
>
> Where the symbol ----> is a bitcoin transaction.
>
> Privacy is improved because an observer of the blockchain cannot link
> Alice's Address 1 to Alice's Address 2, as there is no transaction
> between them. Alice's Address 2 could either be an address in Alice's
> wallet, or the address of someone else she wants to transfer money to.
> CoinSwap therefore breaks the transaction graph heuristic, which is the
> assumption that if a transaction A -> B is seen then the ownership of
> funds actually went from A to B.
>
> CoinSwap doesnt break any of bitcoin's assumptions or features like an
> auditable supply or pruning. It can be built on today's bitcoin without
> any new soft forks.
>
> CoinSwap can't improve privacy much on its own, so it requires other
> building block to create a truly private system.
>
> === ECDSA-2P ===
>
> The original CoinSwap idea uses 2-of-2 multisig. We can get a slightly
> bigger anonymity set by using 2-of-3 multisigs with a fake third public
> key. For a much greater anonymity set we can use 2-party ECDSA to create
> 2-of-2 multisignature addresses that look the same as regular
> single-signature addresses[2]. Even the old-style p2pkh addresses
> starting with 1 can be CoinSwap addresses.
>
> Because the transactions blend in with the rest of bitcoin, an
> application based on CoinSwap would provide much more privacy than the
> existing equal-output coinjoin apps (JoinMarket, Wasabi Wallet and
> Samourai Wallet's Whirlpool). CoinSwaps would also be cheaper for the
> same amount of privacy, as CoinJoin users usually create multiple
> CoinJoins to get effective privacy, for example JoinMarket's tumbler
> script does between 7-12 coinjoins (which are bigger than regular
> transactions too) when run with default parameters.
>
> Schnorr signatures with Musig provide a much easier way to create
> invisible 2-of-2 multisig, but it is not as suitable for CoinSwap. This
> is because the anonymity set for ECDSA would be much greater. All
> addresses today are ECDSA, and none are schnorr. We'd have to wait for
> schnorr to be added to bitcoin and then wait for users to adopt it. We
> see with segwit that even after nearly 3 years that segwit adoption is
> only about 60%, and segwit actually has a sizeable financial incentive
> for adoption via lower fees. Schnorr when used for single-sig doesn't
> have such an incentive, as Schnorr single-sig costs the same size as
> today's p2wpkh, so we can expect adoption to be even slower. (Of course
> there is an incentive for multisig transactions, but most transactions
> are single-sig). As schnorr adoption increases this CoinSwap system
> could start to use it, but for a long time I suspect it will mostly be
> using ECDSA for a greater anonymity set.
>
> === Liquidity market ===
>
> We can create a liquidity market for CoinSwap very similar to how
> JoinMarket works for CoinJoins. In our example above Alice would be a
> market taker and Bob would be a market maker. The taker Alice pays a fee
> to the maker Bob in return for choosing the amount of a CoinSwap and
> when it happens. This allows an excellent user experience because Alice
> can create CoinSwaps for any size she wants, at any time she wants.
> Right now in JoinMarket there is liquidity to create CoinJoins of sizes
> up to about 200 BTC, and we can expect a similar kind of thing with
> CoinSwap.
>
>
> === Multi-transaction CoinSwaps to avoid amount correlation ===
>
> This CoinSwap is vulnerable to amount correlation:
>
>     AliceA (15 BTC) ----> CoinSwap AddressA ----> BobA (15 BTC)
>     BobB (15 BTC) ----> CoinSwap AddressB ----> AliceB (15 BTC)
>
> Where AliceA, AliceB are addresses belonging to Alice. BobA, BobB are
> addresses belonging to Bob. If an adversary starts tracking at address
> AliceA they could unmix this CoinSwap easily by searching the entire
> blockchain for other transactions with amounts close to 15 BTC, which
> would lead them to address AliceB. We can beat this amount correlation
> attack by creating multi-transaction CoinSwaps. For example:
>
>     AliceA (15 BTC) ----> CoinSwap AddressA ----> BobA (15 BTC)
>
>     BobB (7 BTC) ----> CoinSwap AddressB ----> AliceB (7 BTC)
>     BobC (5 BTC) ----> CoinSwap AddressC ----> AliceC (5 BTC)
>     BobD (3 BTC) ----> CoinSwap AddressD ----> AliceD (3 BTC)
>
> Now in the multi-transaction CoinSwap, the market taker Alice has given
> 10 BTC and got back three transactions which add up to the same amount,
> but nowhere on the blockchain is there an output where Alice received
> exactly 15 BTC.
>
> === Routing CoinSwaps to avoid a single points of trust ===
>
> In the original CoinSwap idea there are only two parties Alice and Bob,
> so when they CoinSwap Bob will know exactly where the Alice's coins
> went. This means Bob is a single point of failure in Alice's privacy,
> and Alice must trust him not to spy on her.
>
> To spread out and decentralize the trust, we can create CoinSwaps where
> Alice's payment is routed through many Bobs.
>
>     AliceA ====> Bob ====> Charlie ====> Dennis ====> AliceB
>
> Where the symbol ====> means one CoinSwap. In this situation Alice will
> be a market taker in the liquidity market, and all the other entities
> (Bob, Charlie, Dennis) will be market makers. Only Alice will know the
> entire route, and the makers will only know the previous and next
> bitcoin addresses along the route.
>
> This could be made to work by Alice handling almost everything about the
> CoinSwap on the other maker's behalf. The makers wouldn't have TCP
> connections between each other, but only to Alice, and she would relay
> CoinSwap-relevant information between them. The other makers are not
> aware whether their incoming coins came from Alice herself or the
> previous maker in Alice's route.
>
>
> === Combining multi-transaction with routing ===
>
> Routing and multi-transaction must be combined to get both benefits. If
> Alice owns multiple UTXOs (of value 6 BTC, 8 BTC and 1 BTC) then this is
> easy with this configuration:
>
>              Alice
>     (6 BTC) (8 BTC) (1 BTC)
>        |       |       |
>        |       |       |
>        v       v       v
>               Bob
>     (5 BTC) (5 BTC) (5 BTC)
>        |       |       |
>        |       |       |
>        v       v       v
>             Charlie
>     (9 BTC) (5 BTC) (1 BTC)
>        |       |       |
>        |       |       |
>        v       v       v
>             Dennis
>     (7 BTC) (4 BTC) (4 BTC)
>        |       |       |
>        |       |       |
>        v       v       v
>              Alice
>
> Where the downward arrow symbol is a single CoinSwap hash-time-locked
> contract. Each hop uses multiple transactions so no maker (Bob, Charlie,
> Dennis) is able to use amount correlation to find addresses not directly
> related to them, but at each hop the total value adds up to the same
> amount 15 BTC. And all 3 makers must collude in order to track the
> source and destination of the bitcoins.
>
> If Alice starts with only a single UTXO then the above configuration is
> still vulnerable to amount correlation. One of the later makers (e.g.
> Dennis) knows that the total coinswap amount is 15 BTC, and could search
> the blockchain to find Alice's single UTXO. In such a situation Alice
> must use a branching configuration:
>
>                           Alice
>                          (15 BTC)
>                             |
>                             |
>                             v
>                            Bob
>                           /   \
>                          /     \
>              <-----------       ----------->
>              |                             |
>   (2 BTC) (2 BTC) (2 BTC)        (3 BTC) (3 BTC) (3 BTC)
>              |                             |
>              |                             |
>              v                             v
>           Charlie                       Dennis
>   (1 BTC) (2 BTC) (3 BTC)       (5 BTC) (3 BTC) (1 BTC)
>      |       |       |             |       |       |
>      |       |       |             |       |       |
>      v       v       v             v       v       v
>           Edward                          Fred
>   (4 BTC) (1 BTC) (1 BTC)       (4 BTC) (2 BTC) (1 BTC)
>      |       |       |             |       |       |
>      |       |       |             |       |       |
>      v       v       v             v       v       v
>            Alice                         Alice
>
> In this diagram, Alice sends 15 BTC to Bob via CoinSwap who sends 6 BTC
> on to Charlie and the remaining 9 BTC to Dennis. Charlie and Dennis do a
> CoinSwap with Edward and Fred who forward the coins to Alice. None of
> the makers except Bob know the full 15 BTC amount and so can't search
> the blockchain backwards for Alice's initial UTXO. Because of multiple
> transactions Bob cannot look forward to search for the amounts he sent 6
> BTC and 9 BTC. A minimum of 3 makers in this example need to collude to
> know the source and destination of the coins.
>
> Another configuration is branch merging, which Alice would find useful
> if she has two or more UTXOs for which there must not be evidence that
> they're owned by the same entity, and so they must not be spent together
> in the same transaction.
>
>            Alice                         Alice
>           (9 BTC)                       (6 BTC)
>              |                             |
>              |                             |
>              v                             v
>             Bob                         Charlie
>   (4 BTC) (3 BTC) (2 BTC)       (1 BTC) (2 BTC) (3 BTC)
>      |       |       |             |       |       |
>      |       |       |             |       |       |
>       \       \       \           /       /       /
>        \       \       \         /       /       /
>         \       \       \       /       /       /
>          >------->-------\     /-------<-------<
>                           \   /
>                           Alice
>                          (15 BTC)
>
> In this diagram Alice sends the two UTXOs (9 BTC and 6 BTC) to two
> different makers, who forward it onto Alice. Because the two UTXOs have
> been transferred to different makers they will likely never be co-spent.
>
> These complex multi-transaction routed coinswaps are only for the
> highest threat models where the makers themselves are adversaries. In
> practice most users would probably choose to use just one or two hops.
>
>
> === Breaking change output and wallet fingerprinting heuristics ===
>
> Equal-output CoinJoins easily leak change addresses (unless they are
> sweeps with no change). CoinSwap doesn't have this flaw which allows us
> to break some of the weaker change output heuristics[3].
>
> For example address reuse. If an output address has been reused it is
> very likely to be a payment output, not a change output. In a CoinSwap
> application we can break this heuristic by having makers randomly with
> some probability send their change to an address they've used before.
> That will make the heuristics think that the real change address is
> actually the payment address, and the real payment is actually the
> change, and could result in an analyzer of the blockchain grouping the
> payment address inside the maker's own wallet cluster.
>
> Another great heuristic to break is the script type heuristic. If the
> maker's input are all in p2sh-p2wpkh addresses, and their payment
> address is also of type p2sh-p2wpkh, then the maker could with some
> probability set the change address to a different type such as p2wpkh.
> This could trick a chain analyzer in a similar way.
>
> === Fidelity bonds ===
>
> Anybody can enter the CoinSwap market as a maker, so there is a danger
> of sybil attacks. This is when an adversary deploys huge numbers of
> maker bots. If the taker Alice chooses maker bots which are all
> controlled by the same person then that person can deanonymize Alice's
> transaction by tracking the coins along the route.
>
> A solution to this is fidelity bonds. This is a mechanism where bitcoin
> value is deliberately sacrificed to make a cryptographic identity
> expensive to obtain. The sacrifice is done in a way that can be proven
> to a third party. One way to create a fidelity bond is to lock up
> bitcoins in a time-locked address. We can code the taker bots to behave
> in a way that creates market pressure for maker bot operators to publish
> fidelity bonds. These fidelity bonds can be created anonymously by
> anyone who owns bitcoin.
>
> Fidelity bonds are a genuine sacrifice which can't be faked, they can be
> compared to proof-of-work which backs bitcoin mining. Then for a sybil
> attacker to be successful they would have to lock up a huge value in
> bitcoin for a long time. I've previously analyzed fidelity bonds for
> JoinMarket[4], and using realistic numbers I calculate that such a
> system would require about 55000 BTC (around 500 million USD at today's
> price) to be locked up for 6 months in time-locked addresses. This is a
> huge amount and provides strong sybil resistance.
>
> ==== Who goes first ====
>
> Fidelity bonds also solve the "who goes first" problem in CoinSwap.
>
> This problem happens because either Alice or Bob must broadcast their
> funding transaction first, but if the other side halts the protocol then
> they can cause Alice or Bob's to waste time and miner fees as they're
> forced to use the contract transactions to get their money back. This is
> a DOS attack. If a malicious CoinSwapper could keep halting the protocol
> they could stop an honest user from doing a CoinSwap indefinitely.
> Fidelity bonds solve this by having the fidelity bond holder go second.
> If the fidelity bond holder halts the protocol then their fidelity bond
> can be avoid by the user in all later CoinSwaps. And the malicious
> CoinSwapper could pack the orderbook with their sybils without
> sacrificing a lot of value for fidelity bonds.
>
> As a concrete example, Alice is a taker and Bob is a maker. Bob
> publishes a fidelity bond. Alice "goes first" by sending her coins into
> a 2-of-2 multisig between her and Bob. When Bob sees the transaction is
> confirmed he broadcasts his own transactions into another 2-of-2
> multisig. If Bob is actually malicious and halts the protocol then he
> will cost Alice some time and money, but Alice will refuse to ever
> CoinSwap with Bob's fidelity bond again.
>
> If DOS becomes a big problem even with fidelity bonds, then its possible
> to have Alice request a "DOS proof" from Bob before broadcasting, which
> is a set of data containing transactions, merkle proofs and signatures
> which are a contract where Bob promises to broadcast his own transaction
> if Alice does so first. If Alice gets DOSed then she can share this DOS
> proof publicly. The proof will have enough information to convince
> anyone else that the DOS really happened, and it means that nobody else
> will ever CoinSwap with Bob's fidelity bond either (or at least assign
> some kind of ban score to lower the probability). I doubt it will come
> to this so I haven't expanded the idea much, but theres a longer writeup
> in the reference[5].
>
> === Private key handover ===
>
> The original proposal for CoinSwap involved four transactions. Two to
> pay into the multisig addresses and two to pay out. We can do better
> than this with private key handover[6]. This is an observation that once
> the CoinSwap preimage is revealed, Alice and Bob don't have to sign each
> other's multisig spend, instead they could hand over their private key
> to the other party. The other party will know both keys of the 2-of-2
> multisig and therefore have unilateral control of the coins. Although
> they would still need to watch the chain and respond in case a
> hash-time-locked contract transaction is broadcasted.
>
> As well as saving block space, it also improves privacy because the
> coins could stay unspent for a long time, potentially indefinitely.
> While in the original coinswap proposal an analyst of the chain would
> always see a funding transaction followed closely in time by a
> settlement transaction, and this could be used as a fingerprint.
>
> We can go even further than private key handover using a scheme called
> SAS: Succinct Atomic Swap[7]. This scheme uses adapter signatures[8] to
> create a similar outcome to CoinSwap-with-private-key-handover, but only
> one party in the CoinSwap must watch and respond to blockchain events
> until they spend the coin. The other party just gets unilateral control
> of their coins without needing to watch and respond.
>
>
> === PayJoin with CoinSwap ===
>
> CoinSwap can be combined with CoinJoin. In original CoinSwap, Alice
> might pay into a CoinSwap address with a regular transaction spending
> multiple of her own inputs:
>
>     AliceInputA (1 BTC) ----> CoinSwap Address (3 BTC)
>     AliceInputB (2 BTC)
>
> This leaks information that all of those inputs are owned by the same
> person. We can make this example transaction a CoinJoin by involving
> Bob's inputs too. CoinJoin requires interaction but because Alice and
> Bob are already interacting to follow the CoinSwap protocol, so it's not
> too hard to have them interact a bit more to do a CoinJoin too. The
> CoinJoin transaction which funds the CoinSwap address would look like this:
>
>     AliceInputA (1 BTC) ----> CoinSwap Address (7 BTC)
>     AliceInputB (2 BTC)
>     BobInputA   (4 BTC)
>
> Alice's and Bob's inputs are both spent in a same transaction, which
> breaks the common-input-ownership heuristic. This form of CoinJoin is
> most similar to the PayJoin protocol or CoinJoinXT protocol. As with the
> rest of this design, this protocol does not have any special patterns
> and so is indistinguishable from any regular bitcoin transaction.
>
> To make this work Bob the maker needs to provide two unrelated UTXOs,
> one that is CoinSwapped and the other CoinJoined.
>
> ==== Using decoy UTXOs to protecting from leaks ====
>
> If Bob the maker was just handing out inputs for CoinJoins to any Alice
> who asked, then malicious Alice's could constantly poll Bob to learn his
> UTXO and then halt the protocol. Malicious Alice could learn all of
> Bob's UTXOs and easily unmix future CoinSwaps by watching their future
> spends.
>
> To defend against this attack we have Bob maintain a list of "decoy
> UTXOs", which are UTXOs that Bob found by scanning recent blocks. Then
> when creating the CoinJoin, Bob doesn't just send his own input but
> sends perhaps 50 or 100 other inputs which don't belong to him. For the
> protocol to continue Alice must partially-sign many CoinJoin
> transactions; one for each of those inputs, and send them back to Bob.
> Then Bob can sign the transaction which contains his genuine input and
> broadcast it. If Alice is actually a malicious spy she won't learn Bob's
> input for sure but will only know 100 other inputs, the majority of
> which have nothing to do with Bob. By the time malicious Alice learns
> Bob's true UTXO its already too late because its been spent and Alice is
> locked into the CoinSwap protocol, requiring time, miner fees and
> CoinSwap fees to get out.
>
> This method of decoy UTXOs has already been written about in the
> original PayJoin designs from 2018[9][10].
>
> === Creating a communication network using federated message boards ===
>
> Right now JoinMarket uses public IRC networks for communication. This is
> subpar for a number of reasons, and we can do better.
>
> I propose that there be a small number of volunteer-operated HTTP
> servers run on Tor hidden services. Their URLs are included in the
> CoinSwap software by default. They can be called message board servers.
> Makers are also servers run on hidden services, and to advertise
> themselves they connect to these message board servers to post the
> makers own .onion address. To protect from spam, makers must provide a
> fidelity bond before being allowed to write to the HTTP server.
>
> Takers connect to all these HTTP message boards and download the list of
> all known maker .onion addresses. They connect to each maker's onion to
> obtain parameters like offered coinswap fee and maximum coinswap size.
> This is equivalent to downloading the orderbook on JoinMarket. Once
> takers have chosen which makers they'll do a CoinSwap with, they
> communicate with those maker again directly through their .onion address
> to transmit the data needed to create CoinSwaps.
>
> These HTTP message board servers can be run quite cheaply, which is
> required as they'd be volunteer run. They shouldn't require much
> bandwidth or disk space, as they are well-protected from spam with the
> fidelity bond requirement. The system can also tolerate temporary
> downtimes so the servers don't need to be too reliable either. It's easy
> to imagine the volunteers running them on a raspberry pi in their own
> home. These message board servers are similar in some ways to the DNS
> seeds used by Bitcoin Core to find its first peers on bitcoin's p2p
> network. If the volunteers ever lose interest or disappear, then the
> community of users could find new volunteer operators and add those URLs
> to the default list.
>
> In order to censor a maker, _all_ the message board servers would have
> to co-operate to censor him. If censorship is happening on a large scale
> (for example if the message board servers only display sybil makers run
> by themselves) then takers could also notice a drop in the total value
> of all fidelity bonds.
>
>
> == How are CoinSwap and Lightning Network different? ==
>
> CoinSwap and Lightning Network have many similarities, so it's natural
> to ask why are they different, and why do we need a CoinSwap system at
> all if we already have Lightning?
>
> === CoinSwap can be adopted unilaterally and is on-chain ===
>
> Today we see some centralized exchange not supporting so-called
> ``privacy altcoins'' because of regulatory compliance concerns. We also
> see some exchanges frowning upon or blocking CoinJoin transaction they
> detect[11]. (There is some debate over whether the exchanges really
> blocked transactions because they were CoinJoin, but the principle
> remains that equal-output CoinJoins are inherently visible as such).
> It's possible that those exchanges will never adopt Lightning because of
> its privacy features.
>
> Such a refusal would simply not be possible with CoinSwap, because it is
> fundamentally an on-chain technology. CoinSwap users pay to bitcoin
> addresses, not Lightning invoices. Anybody who accepts bitcoin today
> will accept CoinSwap. And because CoinSwap transactions can be made
> indistinguishable from regular transactions, it would be very difficult
> to even determine whether they got paid via a CoinSwap or not. So
> CoinSwap is not a replacement for Lightning, instead it is a replacement
> for on-chain privacy technology such as equal-output CoinJoins which are
> implemented today in JoinMarket, Wasabi Wallet and Samourai Wallet.
> Ideally this design, if implemented, would be possible to include into
> the many already-existing bitcoin wallets, and so the CoinSwaps would be
> accessible to everyone.
>
> This feature of CoinSwap will in turn help Lightning Network, because
> those censoring exchanges won't be able to stop transactions with
> undetectable privacy no matter what they do. When they realize this
> they'll likely just implement Lightning Network anyway regardless of the
> privacy.
>
> Bitcoin needs on-chain privacy as well, otherwise the bad privacy can
> leak into layer-2 solutions.
>
> === Different ways of solving liquidity ===
>
> Lightning Network cannot support large payment amounts. Liquidity in
> payment channels on the Lightning network is a scarce resource. Nodes
> which relay lightning payments always take care that a payment does not
> exhaust their liquidity. Users of Lightning today must often be aware of
> inbound liquidity, outbound liquidity and channel rebalancing. There
> even exist services today which sell Lightning liquidity.
>
> This CoinSwap design solves its liquidity problem in a completely
> different way. Because of the liquidity market similar to JoinMarket,
> all the required liquidity is always available. There are never any
> concerns about exhausting channel capacity or a route not being found,
> because such liquidity is simply purchased from the liquidity market
> right before it is used.
>
> It is still early days for Lightning, and liquidity has been a known
> issue since the start. Many people are confident that the liquidity
> issue will be improved. Yet it seems hard to imagine that Lightning
> Network will ever reliably route payments of 200 BTC to any node in the
> network (and it doesn't have to to be successful), yet on JoinMarket
> today as I write these words there are offers to create CoinJoins with
> amounts up to around 200 BTC. We can expect similar large amounts to be
> sendable in CoinSwap. The liquidity market as a solution is known to
> work and has been working for years.
>
> === Sybil resistance ===
>
> CoinSwap can support fidelity bonds and so can be made much more
> resistant to sybil attacks. We saw in the earlier section that realistic
> numbers from JoinMarket imply a sybil attacker would have to lock up
> hundreds of millions of USD worth of bitcoin to successfully deanonymize
> users.
>
> It's difficult to compare this to the cost of a sybil attack in
> Lightning network as such attacks are hard to analyze. For example, the
> attacker needs to convince users to route payments through the
> attacker's own nodes, and maybe they could do this, but putting numbers
> on it is hard. Even so it is very likely that the true cost is much less
> than 500 million USD locked up for months because Lightning nodes can be
> set up for not more than the cost of hardware and payment channel
> capacity, while CoinSwap makers would require expensive fidelity bond
> sacrifices.
>
> As this CoinSwap design would cost much more sybil attack, its privacy
> would be much greater in this respect.
>
>
> == How are CoinSwap, PayJoin and PaySwap different? ==
>
> PayJoin can also be indistinguishable from regular bitcoin transaction,
> so why don't we all just that and not go further?
>
> The answer is the threat models. PayJoin works by having the customer
> and merchant together co-operate to increase both their privacy. It
> works if the adversary of both of them is a passive observer of the
> blockchain.
>
> PayJoin doesnt help a customer at all if the user's adversary is the
> merchant. This situation happens all the time today, for example
> exchanges spying on their customers. CoinSwap can help in this
> situation, as it doesn't assume or require that the second party is your
> friend. The same argument applies to PaySwap.
>
> Obviously PayJoin and PaySwap are still very useful, but they operate
> under different threat models.
>
>
> == Conclusion ==
>
> CoinSwap is a promising privacy protocol because it breaks the
> transaction graph heuristic, but it cant work on its own. In order to
> create a truly private system of sending transactions which would
> improve bitcoin's fungibility, CoinSwap must be combined with a couple
> of other building blocks:
>
> * ECDSA-2P
> * Liquidity market
> * Routed CoinSwaps
> * Multi-transaction CoinSwaps
> * Breaking change output heuristics
> * Fidelity bonds
> * PayJoin with CoinSwap
> * Federated message boards protected from spam with fidelity bonds
>
> CoinSwap transactions could be made to look just like any other regular
> bitcoin transaction, with no distinguishing fingerprint. This would make
> them invisible.
>
> I intend to create this CoinSwap software. It will be almost completely
> decentralized and available for all to use for free. The design is
> published here for review. If you want to help support development I
> accept donations at https://bitcoinprivacy.me/coinswap-donations
>
>
> == References ==
>
> - [1] "CoinSwap: Transaction graph disjoint trustless trading"
> https://bitcointalk.org/index.php?topic=321228.0
>
> - [2]
>
> http://diyhpl.us/wiki/transcripts/scalingbitcoin/tokyo-2018/scriptless-ecdsa/
>
> - [3] https://en.bitcoin.it/wiki/Privacy#Change_address_detection
>
> - [4] "Design for improving JoinMarket's resistance to sybil attacks
> using fidelity bonds"
> https://gist.github.com/chris-belcher/18ea0e6acdb885a2bfbdee43dcd6b5af/
>
> - [5] https://github.com/AdamISZ/CoinSwapCS/issues/50
>
> - [6] https://github.com/AdamISZ/CoinSwapCS/issues/53
>
> - [7]
>
> https://lists.linuxfoundation.org/pipermail/bitcoin-dev/2020-May/017846.html
>
> - [8]
>
> https://github.com/ElementsProject/scriptless-scripts/blob/master/md/atomic-swap.md
>
> - [9]
>
> https://blockstream.com/2018/08/08/en-improving-privacy-using-pay-to-endpoint/
>
> - [10] https://medium.com/@nopara73/pay-to-endpoint-56eb05d3cac6
>
> - [11]
>
> https://cointelegraph.com/news/binance-returns-frozen-btc-after-user-promises-not-to-use-coinjoin
>
>
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