A new protocol proposal called Shielded Bitcoin has been published, aiming to provide transaction privacy at the base layer for Bitcoin (BTC). The study titled “Shielded Bitcoin: Private Tran
A new protocol proposal called Shielded Bitcoin has been published, aiming to provide transaction privacy at the base layer for Bitcoin (BTC).
The study titled “Shielded Bitcoin: Private Transfers on the Bitcoin L1,” prepared by Alloc Init researchers Clara Shikhelman, Mikhail Komarov, and Aleksei Moskvin, suggests that Zcash-like private transfers may be possible in Bitcoin without requiring changes to consensus rules or soft forks.
According to the published study, Shielded Bitcoin is designed as a metaprotocol running on top of Bitcoin, rather than using a separate blockchain or a central operator. The system stores values in encrypted “notes,” marks spent notes with publicly available identifiers called “nullifiers” that do not reveal the source of the transaction, and verifies transaction validity with zero-knowledge proofs. Thus, the aim is to prevent the transfer amount, sender, recipient, and the connections between transactions from being publicly visible.
One of the system’s notable aspects is that the Bitcoin network doesn’t directly verify Shielded Bitcoin rules. Shielded Bitcoin data can be added to Bitcoin transactions via OP_RETURN, witness fields, or similar data transfer methods. Bitcoin miners and nodes don’t check whether this data is valid for Shielded Bitcoin. Instead, a special Shielded Bitcoin indexer replays transactions by tracking the Bitcoin blockchain and excludes invalid transactions from the protocol state.
In Shielded Bitcoin, the equivalent of Bitcoin’s UTXO model is a “note” structure. When a note is spent, it is not explicitly shown which note was spent. Instead, a nullifier associated with zero-knowledge proof is issued. This proof confirms that the spent note is valid, that the user has the necessary spending authority, that the nullifier was correctly generated, and that no new Bitcoin was created during the transaction. Reusing a previously used nullifier detects a double-spending attempt.
According to the researchers, this architecture eliminates the need for users to trust a service provider, coordinator, or separate consensus network. Running a Bitcoin node and a shielded Bitcoin indexer is sufficient to verify the system. Private keys remain with the user. The privacy model of the design is significantly inspired by Zcash’s shielded pool architecture.
Regarding Shielded Bitcoin’s connection to the Bitcoin network, the Bitcoin PIPEs mechanism, previously worked on by researchers, stands out. PIPEs aims to hold funds in cryptographically controlled Bitcoin L1 vaults by linking the outcome of zero-knowledge proofs to Bitcoin’s existing signature verification mechanisms. Komarov argues that the system can therefore operate without requiring a soft or hard fork.
However, the published work does not yet represent a Bitcoin protocol update or a widely used, ready-made product. While the scope of the article primarily focuses on the transfer model within the shielded system, it is stated that Bitcoin’s entry and exit mechanisms, namely peg-in and peg-out structures, are part of the broader system design and are outside the scope of the article.
*This is not investment advice.
Continue Reading: Shielded Bitcoin Concept Unveiled – It’s Getting a Lot of Attention – So, What Is It?
