Bitcoin Privacy Essentials: Labels, Coin Control, and How to Freeze Coins
In the world of Bitcoin, the cornerstone of your privacy lies in labels and coin control.
While techniques like CoinJoins and Layer 2 (L2) can enhance your privacy, without a comprehensive understanding of your coins, also known as Unspent Transaction Outputs (UTXOs), you may not have a complete picture of your Bitcoin holdings and financial activities.
Labels: Labels empower you to affix descriptions or tags to your Bitcoin addresses, transactions, inputs, and outputs within your wallet and/or by using Labelbase. Meticulously labeling your transactions serves as a vital tool for tracking your financial activities and discerning the origins or purposes of your bitcoin. It provides context to your transactions, simplifying wallet management and facilitating audits.
Coin Control: Coin control stands as a feature present in certain Bitcoin wallets, granting users the autonomy to manually select which UTXOs to use when crafting a new transaction. This capability is of paramount importance for privacy, as it grants you the ability to pick UTXOs not associated with your identity or those with a favorable transaction history for your specific transaction needs. For instance, you can pick UTXOs with no transaction history or those that have traversed CoinJoin mixing services, thereby fortifying your privacy.
Freezing Coins: Here is where the BIP-329 spendable label takes center stage. This label attribute facilitates the freezing of UTXOs to prevent unintended spending, providing a valuable tool for ensuring that specific UTXOs remain untouched until you explicitly choose to spend them. In my opinion, every wallet should support this feature.
CoinJoins: CoinJoins, as a privacy technique, entail amalgamating multiple users' Bitcoin transactions into a singular transaction, thereby rendering it arduous to trace individual transactions. This amalgamation obscures the origins and destinations of funds, thus enhancing privacy. CoinJoins can be executed through services like Wasabi Wallet, Samourai Whirlpool or JoinMarket. As of today (May 28th, 2024), the Samourai coordinator is no longer available, and the Wasabi zkSNACKs coordinator will be shutting down its service on June 1st, 2024. Please ensure compliance with local laws when accessing these resources or running these apps and services.
Layer 2 (L2): Layer 2 solutions, exemplified by the Lightning Network (LN), are engineered to expedite and economize Bitcoin transactions by conducting the majority of transactions off-chain. In addition to scalability benefits, these solutions offer heightened privacy by shielding transaction details from the public Bitcoin timechain.
In summary, understanding the concept of UTXOs, labeling your transactions, and using coin control features can help you manage and enhance the privacy of your Bitcoin holdings. Techniques like CoinJoins and Layer 2 solutions can further improve your privacy by obfuscating transaction details and reducing the traceability of your financial activities on the Bitcoin timechain.
However, it's essential to stay informed about the latest developments and best practices in Bitcoin privacy, as the landscape is continually evolving.
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