Bitcoin technology is impressive because of the number of fundamental problems it solves with money. Among the touted advantages of Bitcoin is that it provides Final settlement From transactions.
Finality means that once a transaction has been mined and enough subsequent transactions have been mined as well, it would take an unfeasible amount of energy to go back and reverse the original transaction. There is a well-known guideline that a Bitcoin transaction can be considered final if five additional blocks have been added to the timeline following the block containing the transaction.
(For technical readers: With today’s mining hash rate of about 585 exohashes per second, the total work required to reorganize a block 6 blocks deep in the time chain would require about 2 million exohashes, which requires about 63,000 terajoules of energy. That’s equivalent to a thousand Hiroshima-sized atomic bombs.)
So the common wisdom is that after these six confirmations your transaction is a bedrock. But this view is simplistic and doesn’t take into account a very important factor: privacy.
The illusion of the end
In a helpful blog post titled “There is no finality in payments,Patrick Mackenzie presents a compelling argument that challenges common understandings of transaction finality. He argues that finality is not an absolute concept, but rather a “technical-socio-legal construct.” In other words, transaction finality depends on the interaction between technical capabilities, social norms, and legal frameworks.
The common wisdom about the six assurances only takes into account the technological aspect of the settlement. The real end remains elusive if any dominant force, such as a powerful government, can identify the parties involved in a transaction and exercise coercive power over them to invalidate the transaction.
While Bitcoin proponents place their faith in the immutable laws of mathematics and physics to ensure the finality of transactions, McKenzie’s observation is that the socio-legal dimension of finality can trump technological finality. He sums up the idea this way: “If you and the U.S. federal government disagree about whether a transaction is final, you’re wrong.”
We should not ignore the technological dimension of Bitcoin. Unlike all forms of money that preceded it, Bitcoin allows its owner to resist coercion by destroying a secret key or refusing to reveal it, which renders the funds inaccessible forever. By contrast, all other forms of money can be seized unilaterally through physical confiscation or intervention by honest third parties.
While this “nuclear option” of technological finality exists in Bitcoin, it would only be used under extreme circumstances. And even then, invoking it effectively destroys the Bitcoin involved in the transaction—meaning that the payer’s transaction is final, but the payee loses access to the funds permanently. This is essentially a kind of reversal, at least for one side of the transaction.
However, this is largely not the point. The vast majority of Bitcoin transactions – Their number recently exceeded one billion. – It remains vulnerable to reversal through traditional legal and political coercion. Bitcoin’s innovation on the technological front is important, but it does not negate the influence of existing power structures on most real-world transactions.
Enter Privacy: The Missing Link
This is where privacy comes in. Bitcoin privacy is often discussed in the context of censorship resistance and permissionless transactions. However, privacy is also a prerequisite for achieving ultimate settlement.
When transactions are sufficiently private, central authorities lose their leverage over the parties involved. Without the ability to identify the participants, a social-legal apparatus cannot use a single person to force a transaction to be reversed.
Despite the importance of privacy in Bitcoin transactions, it has often been criticized for its lack of it. The transparent nature of the time chain means that all transactions are publicly visible, and in most cases, it is easy to link transactions to real-world identities. This leads to a disturbing conclusion – almost all Bitcoin transactions are reversible!
Promising Privacy Technologies in Bitcoin
The lack of strong privacy in Bitcoin is being addressed through various solutions that provide improved privacy and move the Bitcoin network toward true final settlement.
For example, Fedimints are community-powered, proprietary solutions that combine the privacy benefits of CoinJoin-like mixing with the scalability of the Lightning Network. They use blind signatures and Chaumian e-cash principles to provide strong privacy guarantees to users within trusted communities. This week, Fedi, a leading innovator in Fedimint technology, announced the launch of a new service that allows users to create a secure digital wallet. Full featured app released Anyone can use it to create a federal mint within their own community.
Although Fedimints provide enhanced privacy for transactions within a community of users, they provide limited privacy for on-chain transactions. Furthermore, they do not guarantee finality in the same way that on-chain Bitcoin transactions do, as they rely on the trustworthiness of community operators.
The Lightning Network, while primarily designed to scale Bitcoin transaction volumes beyond what would be possible with on-chain transactions, also offers privacy benefits. By moving payments off-chain, the Lightning Network reduces the amount of information visible on the public timeline. Adding onion routing to Lightning payments further enhances privacy. However, Lightning offers an interesting trade-off between privacy and finality. Users remain anonymous, but their funds are vulnerable to potential loss or theft by channel operators or counterparties.
Silent payments are one of the most promising proposals to enhance privacy and finality in Bitcoin transactions. The protocol, called BIP 352 This technology aims to improve transaction privacy by allowing users to receive payments without revealing their public addresses on the blockchain. By using a combination of stealth addresses and key derivation techniques, silent payments make tracking the flow of funds significantly more difficult.
The power of silent payments lies in their ability to provide strong privacy guarantees while maintaining the finality of Bitcoin transactions on-chain. Unlike off-chain solutions, silent payments operate directly on the Bitcoin time chain, ensuring that transactions benefit from Bitcoin’s powerful “technological settlement” model. This approach can greatly enhance the currency’s fungibility and resistance to attempts to reverse transactions.
Making silent payments a standard feature of Bitcoin wallets would be difficult, as they affect the size of the time series and cannot be implemented in thin clients. However, silent payments are the most promising way to improve settlement finality proposed so far.
The way forward
To build a monetary network that provides true final settlement, the Bitcoin community must prioritize privacy. This includes introducing stronger privacy features at the protocol level, such as silent payments, and creating easy-to-use privacy tools that make private transactions the default, not the exception. Education plays a crucial role in this process, helping users understand the importance of privacy to the long-term safety of the Bitcoin they own.
While the technical properties of Bitcoin provide a strong foundation for final settlement, it is privacy that truly cements that foundation. Without adequate privacy, even the most energy-intensive consensus mechanisms could be undermined by social, legal, or political pressures. Only when Bitcoin transactions are private can Bitcoin realize its full potential as a revolutionary new form of money with truly final and irreversible settlement.
This is a guest post by Dave Birnbaum. The opinions expressed here are entirely his own and do not necessarily reflect the views of BTC Inc. or Bitcoin Magazine.