When Bitcoin was created privacy was not in mind, Bitcoin is a public blockchain and it was created that way. Addresses, balances and transactions are public for anyone to search and track, while that provides transparency, it also lacks privacy.

As a result this lack of privacy can be used by blockchain analysis tools. They work on the principle that in most transactions with more than one input, all of these input addresses belong to the same entity, which can be traced back to its source IP.

This allows companies and governments to track an entity from one address and accurately guess its transactions and holdings in other addresses.

A group at Blockstream recently worked on a new type of transaction aiming at invalidating this principle, Pay to End Point aims at allowing both the sender and the receiver to sign inputs in the transaction, ensuring enough of these transactions exist on the blockchain will invalidate this principle and boost privacy for all Bitcoin users.

Pay to End Point depends on BIP 21 compliant URIs, the receiver adds a variable that allows both the sender and the receiver to sign inputs to a transactions using an end point.

For example, if I want to send 0.1 BTC to Mike, I will input 0.2 to the transaction, Mike will input 0.05 BTC to the transaction and the outputs will be 0.1 to me and 0.15 to Mike. To an outside observer, there is many ways to interpret a transaction here, maybe I used a total input of 0.25 from two different addresses, or maybe I didn’t input anything at all and the two addresses belonged to Mike.

Some of the main disadvantages of this scheme is that both sender and receiver must be online to make the payment, the fees may be superior as the transaction size increases from including more inputs and the user experience may also be slower as it needs interactions from both sides. While the main advantage is better privacy for both sender and receiver, the receiver can consolidate his UTXO set using this transaction and the sending wallet can be a lightweight client!

Resources

• Source Article
• BIP 21