CoinSwap

CoinSwap is a technique designed to enhance privacy for Bitcoin users. Normally, blockchain analysis relies on the idea that if someone transfers an entire UTXO (unspent transaction output) to a new address, it’s just a self-transfer. CoinSwap challenges this by allowing two people to swap UTXOs in a way that breaks the expected transaction trail, making it much harder to trace ownership.

CoinSwap doesn’t change how Bitcoin works at the protocol level. Instead, it uses regular Bitcoin transactions coordinated off-chain over the internet between two parties. Once they agree, each party creates a 2-of-2 multisig address and deposits their UTXO. Later, they jointly spend those funds, ensuring that the UTXOs effectively swap owners. Although the bitcoin amounts remain the same (minus fees), the transaction history is now obscured, improving privacy for both sides.

However, basic CoinSwap has some pitfalls. If the swapped amounts are the same, blockchain observers might still link the transactions by matching amounts and timing. To address this, CoinSwaps can be split into several smaller swaps, which makes analysis more difficult.

There are also security risks. Attackers could disrupt swaps by aborting midway, forcing honest users to pay unnecessary transaction fees. More sophisticated attacks involve an adversary repeatedly engaging in CoinSwaps to de-anonymize UTXOs or by clustering swaps to keep users within their own network. These behaviors could limit the privacy benefits users seek.

To mitigate such attacks, fidelity bonds have been suggested as a safeguard. Here, the maker of a CoinSwap must lock up some bitcoin as a time-locked bond. This penalty discourages attackers, as disrupting many swaps would require tying up significant amounts of bitcoin, making large-scale denial-of-service attacks uneconomical.

While CoinSwap is promising as a privacy tool, it’s still early in development and not yet widely adopted in the Bitcoin ecosystem.