Bitcoin’s Layer 2 State Chains Gain Recognition As The Reality Of Privacy Erosion Sets In

On August 8, the US Treasury added Tornado Cash to its Office of Foreign Assets Control (OFAC) list. Officials alleged that the crypto mixer had been used to launder more than $7 billion worth of crypto tokens since its inception in 2019.

This included more than $455 million in tokens stolen from the Axie Infinity Ronin Bridge hack, which North Korea-affiliated Lazarus Group has claimed responsibility for. And the Harmony Bridge heist, in which the hackers netted a total of $96 million.

Since then, several third-party providers have moved to sever ties with Tornado Cash, including Circle, which blacklisted the company’s USDC wallets. The net result of sanctions compliance saw the platform shut down its operations.

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There are concerns that the US government is deliberately targeting privacy-focused crypto projects by stepping up its regulatory efforts. In doing so, individual freedoms and the right to privacy may be further eroded.

However, various Bitcoin developers, including Nicholas Gregory, developer of Mercury Wallet, have been working on transaction privacy for some time. While their work remains relatively unnoticed, the actions of the US Treasury in sanctioning Tornado Cash have inadvertently cast a spotlight on this area.

Bitcoin is an open ledger

Bitcoin transactions are publicly visible and permanently stored on the ledger. Bitcoin addresses are pseudo-anonymous, meaning the only information associated with them is the flow of transactions.

But, once an address is used, it “takes” the history of all transactions that have interacted with that address.

While this setup does not directly reveal their identity or personal information, the scaling up, typically performed during a centralized exchange with KYC requirements, will tie transactions to an individual. Non-KYC P2P marketplaces exist, but exchange rates are generally unfavorable compared to CEX.

Privacy experts often recommend using a Bitcoin address only once. However, since most wallets do not offer perpetual address functionality, the practicalities of using a single burn address for each transaction are unrealistic for most average users.

Crypto mixers provide a degree of privacy by mixing traceability between users, thereby hiding direct transaction flows. However, a great deal of trust is placed in the mixing service not to scam users or keep records of transactions.

Privacy is eroded

With the growing adoption of crypto over time, little attention has been paid to monitoring and censoring personal transactions. Since the Tornado Cash sanctions, people are starting to reevaluate the potential surveillance of blockchain transactions and the threat it poses to privacy.

Removing a person’s ability to transact could be seen as the content of dystopian nightmares. Yet, far from being science fiction, it is happening now, with the recent Canadian protests being a prime example of discontent.

In February, Canadian truckers protesting the vaccine mandate had their GoFundMe accounts frozen by order of law enforcement. At the time, the truckers had raised a total of C$10 million.

Shortly after, as cryptocurrency was used as a means of circumventing the GoFundMe ban, Prime Minister Justin Trudeau signed into law emergency measures giving authorities the power to freeze or suspend bank accounts without a prescription. of the court.

Pierre Poilievre’s decisive victory in the Conservative Party leadership race showed a growing awareness of the problem in Canada. Poilevere’s campaign centered on reducing the size and scope of government, greater personal freedoms, and the defense of cryptocurrencies. He also expressed his support for truckers and attacked the World Economic Forum.

Increase privacy solutions

In the weeks following the Tornado Cash sanctions, interest in privacy solutions, such as CoinJoin and Mercury Wallet, grew.

Talk to CryptoSlate, Gregory discussed the importance of blockchain privacy. In particular, he thought it was essential to point out that while Mercury offers users transaction privacy, first and foremost, the protocol is a layer 2 running on Statechains. This technology works by exchanging outputs between unknown participants.

The advantage of this method is that trades do not occur on the Bitcoin open ledger, making transactions untraceable to a blockchain analyst. Additionally, as the Statechain has a larger block size base layer capability, the system is much more scalable than the mainchain.

Taking a Bitcoin UTXO, the technology allows for a collection of various transition states. Essentially, the UTXO, or private key to access the output of the transaction, can be sent between users, which means ownership changes, but the funds do not “flow”.

Gregory believes that if Bitcoin is to be used as a currency, technologies such as Mercury Wallet can help bridge the current fungibility gap. With that, he remains hopeful that Statechains’ value proposition will attract more users to the Mercury platform.

“I hope the technology behind Mercury, Statechains, will become one of Bitcoin’s scaling layers. I think it’s okay. There are a lot of synergies between that and Lightning, it solves a lot of problems that Lightning solves…”

As an added attraction, and to counter the problem of privacy platforms keeping records of transactions, Gregory mentioned that the developers are working on making Mercury “completely blinded.” By doing so, the protocol will not collect any user data.

With additional efforts centered on selling Statechains to bring in more liquidity, Gregory is optimistic that the incentives will be in place to spur a flood of new users to the platform.

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Bitcoin’s Layer 2 State Chains Gain Recognition As The Reality Of Privacy Erosion Sets In


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