Bitcoin Could Adopt Zcash-Like Privacy While Keeping Its Existing Rules Intact

Researchers have outlined a proposal that could bring Zcash-style private payments to Bitcoin without changing the network’s existing rules. However, the project still lacks a completed mechanism for transferring real BTC into the system and taking it back out.

The research was published as privacy-focused cryptocurrencies, led by Zcash, receive renewed attention from investors. The paper, Shielded Bitcoin, was released Thursday by Clara Shikhelman, Mikhail Komarov and Aleksei Moskvin of cryptography firm [alloc] init.

The proposed system would represent bitcoin-denominated funds as encrypted records known as notes. When a user spends a note, the system would publish a marker showing that it had been used, together with a mathematical proof demonstrating that the spender controlled the funds and had not generated additional coins.

The transaction amount, sender and recipient would remain concealed.

Shielded Bitcoin differs from Zcash in how those proofs are handled. Zcash verifies its cryptographic proofs directly through the blockchain. Under the proposed Bitcoin system, encrypted payment information would be recorded on Bitcoin, while independent software would perform the verification. This creates a situation where the Bitcoin transaction itself could be accepted even if the private payment inside it failed the Shielded Bitcoin checks.

The proposal comes as privacy becomes increasingly relevant to cryptocurrency applications involving business payments, payroll and everyday spending. Conventional Bitcoin transactions permanently expose wallet addresses and amounts. Once an address is associated with a person or business, other transactions connected to that address can become easier to monitor.

Ethereum developers are exploring a similar privacy concept through a proposed shared private pool. The system could allow users to move ether and other tokens without revealing payment information publicly, with payroll, treasury management and donations among the potential applications.

Zcash’s Privacy System

Zcash allows users to choose between transparent transactions, which expose addresses and amounts, and shielded transactions, which encrypt those details.

CoinDesk calculations based on ZecStats data showed that shielded pools held around 4.9 million ZEC on Friday, an increase of 14% from July 30. The holdings represented approximately 29% of Zcash’s issued supply and were worth about $7.8 billion after the token’s recent rally.

Zcash recorded approximately 63,000 shielded transactions last week, its highest weekly level for private transfers since 2022 and fourth-highest on record. Total reported transfer volume exceeded $23 billion, making it the network’s largest weekly figure since 2021 and its second-highest overall.

The activity has coincided with increased investor attention. By early September, ZEC had risen more than 2,300% over the previous 12 months and surpassed $1,000. The token continued its climb above $1,600 on Wednesday.

The connection between Bitcoin privacy research and Zcash goes back to 2013, when Zerocoin was proposed as a privacy extension for Bitcoin. Later work on Zerocash eventually resulted in Zcash, which launched as a separate cryptocurrency in 2016.

Under Shielded Bitcoin, encrypted payment information would remain on the Bitcoin blockchain. Users could reconstruct accepted private transactions from the public record using their wallet keys. Separate viewing keys could also allow transaction details to be shared with an accountant or auditor without giving that person control over the funds.

BTC Deposits Remain an Open Issue

The paper does not yet explain how users would move regular BTC into the system or withdraw it afterward. Those mechanisms are reserved for separate research involving PIPEs, a technology intended to lock a Bitcoin signing key until specified conditions are satisfied.

The researchers’ claim that users retain control of their funds applies to transfers conducted within the proposed system and specifically does not cover deposits or withdrawals.

The missing functionality has drawn criticism from developers and Zcash supporters.

Mert Mumtaz, co-founder of Helius and a Zcash advocate, described the proposal on X as a synthetic ledger with significant tradeoffs. He raised concerns about its trusted setup and the lack of fee anonymization, which could leave the Bitcoin wallet used to publish a private transaction visible.

Mumtaz also highlighted the absence of an in-protocol method for moving actual BTC into and out of the system. Without such a mechanism, he argued, the system would effectively involve synthetic representations of Bitcoin.

He nevertheless acknowledged the researchers’ efforts and their use of ideas developed through Zcash. He said the proposal would need years of additional research and development.

Cypherpunk, a company that holds and mines Zcash, welcomed the research but said it did not see the proposal as a direct competitor to Zcash. The company said privacy is most effective when incorporated into a blockchain’s base layer, while noting that avoiding changes to Bitcoin is both a major benefit and a significant limitation of the design.

The company also said that additional privacy for Bitcoin could benefit the wider cryptocurrency ecosystem.

The [alloc] init team acknowledges several limitations in its current design. The reference implementation requires a cryptographic setup whose security depends on at least one participant behaving honestly. Transaction timing and fee payments would remain visible, while an efficient way for lightweight wallets to verify reconstructed payment histories remains future work.

Komarov estimates that a private transfer would require about 700 virtual bytes, compared with roughly 100 to 200 virtual bytes for a standard Bitcoin transaction. At the same fee rate, this could make the miner fee approximately four times higher.

No launch date had been announced for Shielded Bitcoin as of Friday.