Bitcoin technology is great because it solves many fundamental problems related to money. The benefits of Bitcoin are often cited as: Final settlement Of the transaction.
Final settlement means that after a transaction has been mined, and enough subsequent transactions have also been mined, it would take an infeasible amount of energy to go back and undo the original transaction. There is a well-known guideline that a Bitcoin transaction is considered final once five additional blocks have been added to the timechain after the block containing the transaction.
(For our technical readers: the current mining hash rate is about 585 exohashes per second, so the total work required to rearrange a block six blocks deep on the timechain would be about 2 million exohashes, requiring about 63,000 terajoules of electricity, the equivalent of 1,000 Hiroshima-type atomic bombs.)
So conventional wisdom would suggest that once a transaction has been confirmed six times, it’s practically confirmed. But this assumption is simplistic and ignores a key factor: privacy.
Illusion of the End
“There is no finality in payment.Patrick Mackenzie develops a compelling argument that challenges the common understanding of transaction finality. He argues that finality is not an absolute concept, but a “techno-socio-legal construct.” In other words, the finality of a transaction depends on the interplay of technological capabilities, social norms, and legal frameworks.
The conventional wisdom about six confirmations only considers the technical aspects of settlement. True finality remains unclear when a powerful government or other hegemonic power can identify the parties to a transaction and use coercive power to reverse the transaction.
Bitcoin proponents often rely on the immutable laws of mathematics and physics to guarantee the finality of transactions, but MacKenzie observes that socio-legal aspects of finality can and do take precedence over technical finality. He sums up the idea this way: “If you and the U.S. federal government disagree on whether a transaction is final, you’re wrong.”
The technical aspect of Bitcoin’s finality should not be underestimated. Unlike all forms of money before it, Bitcoin can resist coercion by its owner refusing to destroy or divulge his private key, rendering his funds permanently inaccessible. In contrast, all other forms of money can be unilaterally seized by physical confiscation or the intervention of a custodial third party.
Bitcoin has this “nuclear option” of technical finality, but it is only invoked under extreme circumstances. And even then, invoking it effectively destroys the Bitcoins involved in the transaction. That means the payer’s transaction is final, but the recipient loses access to their funds forever. This is essentially a kind of inversion, at least for one side of the transaction.
But this doesn’t really matter. The vast majority of Bitcoin transactions are Recently surpassed 1 billion – It remains vulnerable to overturning traditional legal and political coercion. Bitcoin’s innovation in technical finality is significant, but it does not negate the influence of existing power structures over 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, but privacy is also a fundamental requirement for ultimate settlement.
If transactions are kept sufficiently secret, centralized authorities have no leverage over the parties involved: without being able to identify the participants, there are no individuals that socio-legal mechanisms can intervene to forcibly reverse a transaction.
Despite their importance, privacy in Bitcoin transactions has often been criticized as lacking. The transparency of the timechain means that all transactions are public and in most cases it is easy to link a transaction to a real-world identity. This leads to the disturbing conclusion that nearly all Bitcoin transactions are reversible.
Promising Bitcoin Privacy Technology
The lack of robust privacy in Bitcoin is being addressed by a variety of solutions that provide enhanced privacy and move the Bitcoin network towards true final settlement.
For example, Fedimint is a community-run custody solution that combines the privacy benefits of mixing like CoinJoin with the scalability of the Lightning Network. It uses blind signatures and the principles of Chaumian electronic cash to provide strong privacy guarantees to users within a trusted community. This week, Fedi, the leading innovator of Fedimint technology, announced: Fully featured app released Anyone can use it to establish a Union Mint within their community.
Fedmint enhances the privacy of transactions within the user community, but on-chain transactions have limited privacy and do not guarantee finality like on-chain Bitcoin transactions, as they rely on the trustworthiness of the community operators.
The Lightning Network is designed primarily to scale Bitcoin transaction volume beyond what is possible with on-chain transactions, but it also offers privacy benefits. By moving payments off-chain, Lightning reduces the amount of information visible on the public timechain. Adding onion routing to Lightning payments further enhances privacy. However, Lightning presents an interesting trade-off between privacy and finality: users obfuscate their identities, but their funds are exposed to potential loss or theft by channel operators or counterparties.
Silent Payment It is one of the most promising proposals for enhancing both the privacy and finality of Bitcoin transactions. VIP 352 Silent Payments aims to improve transaction privacy by allowing users to receive payments without exposing their public addresses on the timechain. Using a combination of stealth addresses and key derivation techniques, Silent Payments makes it extremely difficult to trace the flow of funds.
The strength of Silent Payments is that it provides strong privacy guarantees while preserving the finality properties of on-chain Bitcoin transactions. Unlike off-chain solutions, Silent Payments operates directly on the Bitcoin timechain, ensuring that transactions benefit from Bitcoin’s robust “technical settlement” model. This approach makes the coin significantly more fungible and resistant to attempts to reverse transactions.
Making silent payments a standard feature of Bitcoin wallets would be difficult because it would impact the size of the timechain and would not be possible to implement on thin clients. However, silent payments are the most promising way to improve payment finality proposed so far.
The way forward
To build a financial network that provides true final settlement, the Bitcoin community must make privacy a top priority. This includes introducing stronger privacy features at the protocol level, such as silent payments, and creating user-friendly privacy tools that make private transactions the default rather than the exception. Education plays a key role in this process, helping users understand that privacy is important to the long-term security of their Bitcoin holdings.
Bitcoin’s technical properties provide a strong foundation for final settlement, but it is privacy that truly makes it strong. Without sufficient privacy, even the most energy-intensive consensus mechanisms can be undermined by social, legal, or political pressures. Only if Bitcoin transactions are private can Bitcoin fully realize its potential as a revolutionary new form of currency with truly irreversible final settlement.
This is a guest post by Dave Birnbaum. The opinions expressed here are entirely his own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
