The model working on LN offers users “deniability” and is called CoinJoin XT.
The right to anonymity and privacy, through bitcoin as a payment method, is expressed in the use of addresses not linked to a real identity.
But since all transactions are transparent and visible on the blockchain, connecting the real identity to a given address takes very little.
The goal of blockchain analysts is to monitor the unencrypted peer-to-peer network.
The analysis of the public blockchain and the Know Your Customer (KYC) or Anti-Money Laundering (AML) policy allow, thanks to the information obtained, to determine who uses bitcoins and for what.
The bitcoin user who thinks he is anonymous will be disappointed to know that his privacy is not protected. However, there are some measures that can increase it.
For example, using a new address to receive a new payment, using different wallets for different purposes, hiding the computer IP with Tor, or using mixing services to hide transactions are more commonly used tactics.
CoinJoin to improve privacy
One of the ways to increase privacy and improve fungibility is through CoinJoin which tries to prevent blockchain analysts from recognizing addresses by providing inputs (sent from) to transactions in order to make it difficult or impossible to distinguish property/output control (sent to).
CoinJoin was designed by Gregory Maxwell and the idea behind this system is quite simple: “When you want to make a payment, find someone else who also wants to make a payment and make a joint payment together.”
By merging multiple user transactions into one, you get to spend bitcoins from different addresses to different addresses – and since none of the send addresses specifically pay for any of the receive addresses, there’s no connection between their.
Unfortunately, this system of intrinsic fungibility is not yet the optimum since all transactions, albeit anonymous, can be recognized as passed by CoinJoin.
In addition, using CoinJoin to improve privacy degrades scalability.
In his blog post, Adam Gibson, developer of CoinJoin, argues that this system that reduces scalability “represents searching for privacy, in a blockchain context, in slightly the wrong way.”
Gibson believes that attempting to conceal or otherwise obfuscate transactions is problematic as it degrades security by introducing invisible breaks, scaling down scalability, or degrading trustlessness. If we try to make the blockchain private, we are slightly pushing against its intrinsic nature.
Lightning Network and CoinJoin XT guarantee more anonymity
Using Lightning Network one could leverage on a characteristic of Bitcoin’s blockchain as evidence of resistance to censorship of state changes. The model working on LN offers users “deniability” and is called CoinJoin XT.
When asked what “deniability” is, Gibson replies: “I am trying to create a situation where there are no simple flags or watermarks in 1 or more transactions that allow the blockchain analyst to find that set and say” ah, that’s mixing “. In general, you could use CoinJoin without people knowing you’ve done it (so kinda ‘’deniable’’ rather than a blurring / concealment).”
Blockchain analysts rely on certain assumptions when it comes to analyzing block networks and finding users’ identities.
The purpose of CoinJoin XT would be to invalidate or deny these assumptions, displacing the analyst for the impossibility of recognizing CoinJoin XT transactions as such.
This “deniability” is possible using the double funding LN channels. If the channel is financed and used, the initial budget will change and once closed, it will not be possible to know which transactions belonged to whom. It is a form of increased privacy off-chain as it does not happen on the Bitcoin blockchain, but on a higher level on the Lightning Network.
Even here, however, there are certain conditions that must be respected to ensure maximum privacy. The difference between the inputs of the two parts must be minimal because the bigger it is, the easier it is to identify the origin of the transactions. The double-funding LN channel should be less than 0.16 BTC in order to operate correctly with CoinJoin XT.
Gibson admits in his blog post that there are still fingerprints to be eliminated to make the CoinJoinXT system perfect. Timeline correlation so as to prevent sending all transactions together rather than spread over time and the implementation of Shnorr’s multisig key aggregation would improve the system in its task of protecting privacy.
“Lightning is hopefully going to emerge as a principal way through which people will gain fungibility for their everyday payments”.