A New York cryptography lab unveiled Shielded Bitcoin on Sept. 24, proposing a mechanism for private Layer 1 transfers on Bitcoin without requiring a soft fork. The system conceals transaction amounts and counterparties while leaving Bitcoin's core rules untouched.
Shielded Bitcoin uses Bitcoin as a public bulletin board, storing encrypted data that Bitcoin itself cannot interpret. External software called indexers verify payments and reconstruct the private system's history by scanning the blockchain and validating cryptographic proofs.
The proposal uses encrypted notes and zero-knowledge proofs to facilitate private transfers. When Alice pays Bob, she generates an encrypted note containing the amount and Bob's receiving information. She then publishes a Bitcoin transaction with the encrypted note, a serial number (nullifier), and a ZK proof that verifies her notes exist, that she can spend them, and that value entering the system equals value exiting—all without revealing specific notes or amounts.
Indexers verify the proof and confirm each nullifier has not been used previously, preventing the same note from being spent twice. Bob's wallet scans for encrypted notes until his viewing key opens one intended for him.
Onchain, observers see that a shielded transfer occurred, including its timing and the number of notes involved, but not the transaction's specific contents. Any user can rerun verification checks using Bitcoin's published history, ensuring no single indexer controls validity of private transactions.
The white paper "Shielded Bitcoin: Private Transfers on the Bitcoin L1" was authored by Clara Shikhelman, Mikhail Komarov, and Aleksei Moskvin. Their research explores whether Bitcoin can facilitate private value transfers using its existing network.
One significant challenge remains: the researchers have not yet finalized the mechanism for moving bitcoin into and out of this private system.
