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Statechains Scaling Solution Offers New Potential for Bitcoin Privacy

Statechains offer another way to scale bitcoin payments. New exploration shows that this layer 2 tech could boost Bitcoin privacy as well.



Statechains Scaling Solution Offers New Potential for Bitcoin Privacy

London-based startup CommerceBlock has revealed that they are working on a new tool for boosting Bitcoin privacy. Their new Mercury Wallet tests the new technology and, if all goes well, will soon put it into practice. The privacy tool uses statechains, a layer currently being built on top of Bitcoin to help the digital currency scale above its limitations so that it can reach more users.

CommerceBlock’s code for the in-progress project is open-source, so anyone can give it a look, spot and report bugs, and even alter the code and use it for their own purposes if they desire. But the company also uses this statechain code and its sidechain code for proprietary projects with as-yet undisclosed institutions.

CommerceBlock has been working on the first-known implementation of statechains, which makes Bitcoin’s future look a little bit rosier in terms of scalability. Currently Bitcoin doesn’t support more than a few transactions per second. But various layer 2 solutions like the Lightning Network, and now, statechains, are helping users to get around this limitation.

Scale is the main purpose of statechains. In addition to building a code implementation, called Mercury, CommerceBlock has been laying the building blocks to make this layer accessible to average users with Mercury Wallet. Here, users can set up statechains and make actual statechain transactions. (Warning: The wallet is for testing only right now and is not safe for real coins.)

More recently, however, CommerceBlock developers have discovered that statechains also offer privacy benefits, which they are now also building into Mercury Wallet, as CommerceBlock outlines in an exploratory blog post.

Bitcoin transactions aren’t very private. The history of transactions of every user is stored permanently by the Bitcoin network. Users have to be extra diligent if they want to cover their tracks successfully.

CommerceBlock has been experimenting with making these privacy transactions work on top of statechains.

“Financial privacy, we believe, is right and necessary; it’s not practical that every time people use bitcoin that the holdings become public to the receiver of their payment,” CommerceBlock CEO Nick Gregory told CoinDesk, adding that institutions CommerceBlock is working with have also expressed interest in increasing their privacy so other institutions can’t see their bitcoin holdings.

An early version of Mercury Wallet putting statechain transactions into practice(CommerceBlock)

So far, CommerceBlock is the only company known to be working on statechains.

New Bitcoin privacy potential

CoinJoins, on Wasabi Wallet and Samourai Wallet, are the most popular way to make private bitcoin transactions today. CoinSwaps, on the other hand, can use a different technique to make these sorts of private transactions undetectable. CoinSwaps are currently in the testing phase.

Gregory thinks they could both get a boost from statechains.

“CoinJoins and CoinSwap work great at the moment. However, they are time-consuming and costly as you have to wait for bitcoin confirmations for each CoinJoin or swap,” Gregory said.

On statechains, however, transactions are instant and cheap. They accomplish this by taking transactions to a layer above most bitcoin transactions.

Bitcoin is made up of a long trail of blocks. Each block contains “on-chain” transactions. Each block has limited space. “Off-chain” transactions, on the other hand, avoid blocks.

Because statechains allow users to make transactions off-chain, outside of blocks, they don’t have to wait. “By moving this off-chain in a noncustodial protocol they become instant and less costly,” Gregory explained.

The other downside of CoinJoins is that they leave an imprint on the Bitcoin blockchain.

CoinJoining or CoinSwapping on a statechain could add more privacy since these sorts of transactions don’t need to be embedded in the blockchain. “CoinSwaps that occur in a statechain are off-chain, and thus their history never makes it on-chain,” CommerceBlock’s blog post states.

CommerceBlock admits that there’s an obvious tradeoff with statechains. As we’ll explain in a minute, statechains users need to place trust in the statechain provider to a degree. But if users are willing to do so, they could see privacy benefits when CommeceBlock rolls out a real wallet that can be used for more than just testing.

A new scalability layer

Now let’s take a deeper look at statechains, the construction that makes these new private transactions possible.

On-chain Bitcoin transaction space is very limited. If Bitcoin aficionados want the digital currency to be made accessible to as many people as possible, they need to get around this limit.

Bitcoin’s Lightning network is currently the most popular method of scaling Bitcoin transactions. Lightning offers a way to make transactions securely without taking up block space, which means faster and cheaper transactions. To this end, statechains are comparable.

Similar to the Lightning network, statechains are powered by multi-signature transactions, which require that more than one user sign off on a transaction before it can be completed. In the case of statechains, 2-of-2 private keys need to sign off. One key belongs to the user and another belongs to the statechain provider – in this case, CommerceBlock.

To pass on the funds, the user simply sends the private key to the recipient. Sending someone your private key is usually a recipe for getting all of your funds stolen. But the idea here is that the statechain provider is supposed to have the user’s back and not allow that to happen.

Since the Lightning network is better known than statechains, let’s compare and contrast them.

Statechains vs. Lightning network: Pros

Statechain users don’t have to deal with routing or liquidity issues like Lightning users do. With statechains, the private key is simply transferred to another owner.

Unlike Lightning, there’s no need for a payment to move through a network; thus the transaction avoids the risk of failing if one hop in the network doesn’t have enough funds. Liquidity is probably the toughest problem Lightning users face today, though innovative new tools have been cropping up in the hopes of making this problem more manageable.

Direct transactions via statechains are thus better for larger payments where routing can be harder.

Statechains vs. Lightning network: Cons

Statechains require more trust than the Lightning network does. The statechain providers need to be trusted not to collude with a previous private key holder. This sort of trust is not required for Lightning payments.

Say Alice is using a statechain to pass the private key to Bob. Bob is supposed to be the owner of the funds. But theoretically, Alice and the statechain could collude to take Bob’s funds. Built-in protections can help guard against this collusion – if the statechain provider cheats, users will be able to see, damaging the reputation of the statechain provider.

Statechain payment amounts are fixed. Say Alice creates a statechain holding 1 BTC, or 0.001 BTC, or whatever amount she likes. Once this value is chosen, and Alice creates the statechain, that amount is set in stone. Let’s say she decides on 1 BTC. When making a payment, she has to send the 1 full bitcoin – she can’t split it into smaller payments. As such, statechains are not ideal for multiple, smaller payments. That’s where Lightning shines.

Since statechains and Lightning each serve different use cases, Gregory sees them as “complementary.” He expects that they will be just as popular as the Lightning network in the long term. “Our goal is certainly to make them as big as Lightning,” Gregory said.




World’s Oldest Central Bank Extends Digital Currency Test Till 2022

Riksbank said it would continue developing a technical solution for a central bank-issued e-krona under its pilot project.



Sweden’s Riksbank said it would continue work with Accenture on a potential e-krona digital currency until next year.

(Mario Ortiz/Shutterstock)

Feb 17, 2021 at 10:12 a.m. UTC

World’s Oldest Central Bank Extends Digital Currency Test Till 2022

The world’s oldest central bank, Sweden’s Riksbank, is to extend its pilot project for a potential central bank digital currency (CBDC) for another 12 months.

According to a press release on Friday, the project, which is being carried out with assistance from professional services firm Accenture, will run until February 2022.

The Riksbank said it would continue developing a technical solution for a central bank-issued e-krona “as a complement to cash,” with the primary objective being for the bank to increase its knowledge around the technology.

For 2021, the institution will continue developing its potential digital currency offering with a focus on performance and scalability. Testing offline functions and bringing external participants into the test environment is also on the table.

The project has raised some concerns from Sweden’s commercial banking sector over the viability of a sovereign CBDC and how that would impact the entire banking system.

There is no final decision over the issuance of the e-krona despite strong lobbying from the central bank to government last year. But with traditional cash seeing falling use, even more so during the coronavirus pandemic, Sweden has been mulling a switch to the CBDC.

However, questions still remain over the digital currency’s ultimate design and underlying technology, according to Friday’s release.



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Bitcoin Mining: Wasted Energy or a Better, Greener System?

Harry Sudock, VP of strategy at GRIID Infrastructure on the modern energy landscape, how far we’ve come and where bitcoin mining fits.



Is it wasteful to use electricity mining bitcoin? As the Biden Administration settles into power with an ambitious agenda around clean energy, notably promising to eliminate carbon emissions from the US power generation sector by 2035, the question of bitcoin mining and it’s ever-growing use of energy bubbles up once more.

In this episode of ‘On Purpose, With Tyrone Ross,’ Harry Sudock, VP of strategy at GRIID Infrastructure joins the show to discuss the modern energy landscape, how far we’ve come and where bitcoin mining can fit into a sustainable energy system.

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Deutsche Bank Quietly Plans to Offer Crypto Custody, Prime Brokerage- CoinDesk

The bank’s game plan was hidden in plain sight in a widely overlooked report by the World Economic Forum.



The bank’s game plan was hidden in plain sight in a widely overlooked report by the World Economic Forum.

Deutsche Bank headquarters in Frankfurt, Germany (Thomas Lohnes/Getty Images)

Feb 13, 2021 at 2:10 a.m. UTCUpdated Feb 13, 2021 at 2:18 a.m. UTC

Deutsche Bank Quietly Plans to Offer Crypto Custody, Prime Brokerage

Deutsche Bank has joined the growing ranks of large financial institutions exploring cryptocurrency custody, with aspirations to offer high-touch services to hedge funds that invest in the asset class.

The Deutsche Bank Digital Asset Custody prototype aims to develop “a fully integrated custody platform for institutional clients and their digital assets providing seamless connectivity to the broader cryptocurrency ecosystem,” according to a little-noticed report by the World Economic Forum, host of the annual gathering of muckety-mucks in Davos, Switzerland.

In a passage buried on page 23 of the December 2020 report, Germany’s largest bank says it plans to create a trading and token issuance platform, bridging digital assets with traditional banking services, and managing the array of digital assets and fiat holdings in one easy-to-use platform.

Big banks are now announcing plans to enter crypto custody on an almost daily basis, with Bank of New York Mellon, the world’s largest custodian bank, joining the party earlier this week.

U.S. banks were given some regulatory clarity thanks to last year’s interpretation letters from the Office of the Comptroller of the Currency. In Germany, firms are queuing up to get their hands on special crypto custody licenses from the country’s regulator, BaFIN.

Deutsche, the world’s 21st largest bank, said it aims to “ensure the safety and accessibility of assets for clients by offering an institutional-grade hot/cold storage solution with insurance-grade protection.” No specific cryptocurrencies or tokens are mentioned.

The digital asset custody platform would be launched in stages. It would eventually provide clients with the ability to buy and sell digital assets via a partnership with prime brokers (which act sort of like concierges for hedge funds), issuers and vetted exchanges.

The bank says it would also provide “value-added services such as taxation, valuation services and fund administration, lending, staking and voting, and provide an open-banking platform to allow onboarding of third-party providers.”

The service would be aimed at asset managers, wealth managers, family offices, corporates and digital funds, the bank said.

In terms of a business model, the bank would start out collecting custody fees, it said, later charging fees for tokenization and trading.

Deutsche said it has completed a proof of concept and is aiming for a minimum viable product in 2021, while exploring global client interest for a pilot initiative.

The bank’s press office could not be reached for comment Friday evening. A spokesperson had declined to comment on potential plans for a digital asset custody business when contacted last week by CoinDesk.



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