Bitcoin technology is impressive because of the number of fundamental problems with money that it solves. One advantage of Bitcoin that is often touted is that it provides final settlement of transactions.

Final settlement means that once a transaction has been mined, and enough subsequent transactions have been mined, it would take an unfeasible amount of energy to go back and undo the original transaction. There is a well-known guideline that a bitcoin transaction can be considered final if five additional blocks are added to the timechain after the block containing the transaction.

(For technical readers: at the current mining hash rate of around 585 exohashes per second, the total work required to reorganize a block 6 blocks deep in the timechain would require around 2 million exohashes, which requires around 63 thousand terajoules of power. This is the equivalent of a thousand Hiroshima-sized atomic bombs.)

And so the conventional wisdom suggests that after these six confirmations of your transaction, it’s pretty much set in stone. However, this view is simplistic and fails to take into account a crucial factor: privacy.

The illusion of finality

In an illuminating blog post titled “Finality does not exist in payments,” Patrick McKenzie makes a compelling argument that challenges the prevailing view of transaction finality. He argues that finality is not an absolute concept, but rather a “technosociolegal construct.” In other words, the finality of a transaction depends on an interplay of technical affordances, social norms, and legal frameworks.

The common wisdom about six confirmations only considers the technological aspect of settlement. True finality remains elusive if a hegemon, such as a powerful government, can identify the parties involved in a transaction and force them to reverse a transaction.

While Bitcoiners often rely on the immutable laws of mathematics and physics to ensure the finality of transactions, McKenzie’s observation is that the socio-legal dimension of finality can and does trump technological finality. He summarizes the idea this way: “If you and the United States federal government disagree about whether a transaction is final, you’re wrong.”

The technological dimension of finality of Bitcoin should not be underestimated. Unlike all forms of money that have come before it, Bitcoin allows its holder to resist coercion by destroying or refusing to reveal a private key, rendering funds forever inaccessible. In contrast, all other forms of money can be seized unilaterally through physical seizure or intervention with third parties holding them.

While this “nuclear option” of technological finality does exist with bitcoin, it would only be invoked under extreme circumstances. And even then, invoking it effectively destroys the bitcoin involved in the transaction – meaning the payer’s transaction will have finality, but the payee will permanently lose access to the funds. This is essentially a kind of reversal, at least for one side of the transaction.

This, however, is largely beside the point. The vast majority of bitcoin transactions – recently numbering over a billion – remain vulnerable to reversal by conventional legal and political coercion. Bitcoin’s innovation in technological finality is significant, but it does not negate the influence of existing power structures on most real-world transactions.

Implementing Privacy: The Missing Link

This is where privacy comes into the equation. Bitcoin privacy is often discussed in the context of censorship resistance and permissionless transactions. However, privacy is also a fundamental requirement for achieving a final settlement.

When transactions are sufficiently private, centralized authorities lose their influence over the parties involved. Without the ability to identify the participants, there is no individual who can call upon a socio-legal apparatus to reverse a transaction.

Despite its importance, privacy in bitcoin transactions has often been criticized as lacking. The transparent nature of the timechain means that all transactions are publicly visible, and in most cases it is trivial to link transactions to real-world identities. This leads to a disturbing conclusion: almost all bitcoin transactions are reversible!

Promising Bitcoin Privacy Technologies

Bitcoin’s lack of robust privacy is being addressed with several solutions that provide enhanced privacy and move the Bitcoin network toward true final settlement.

Fedimints, for example, are community-operated custodial solutions that combine the privacy benefits of CoinJoin-like mixes with the scalability of the Lightning Network. They use blind signatures and Chaumian e-cash principles to provide strong privacy guarantees for users within trusted communities. This week, Fedi, a leading innovator in Fedimint technology, released a fully-featured app that anyone can use to set up a federated mint within their own community.

While Fedimints offer enhanced privacy for transactions within a community of users, they offer limited privacy for on-chain transactions. Furthermore, they do not guarantee finality in the same way that on-chain bitcoin transactions do, as they rely on the trustworthiness of the community operators.

The Lightning Network is primarily designed to scale Bitcoin transaction volume beyond what would be possible with on-chain transactions, but it also offers privacy benefits. By moving payments off-chain, Lightning reduces the amount of information exposed on the public timechain. Adding onion routing to Lightning payments further enhances privacy. However, Lightning presents an interesting tradeoff between privacy and finality. Users obscure their identity, but their funds are exposed to potential loss or theft by channel operators or counterparties.

Silent payments are one of the most promising proposals to improve both the privacy and finality of bitcoin transactions. A protocol enhancement called BIP 352 aims to improve transaction privacy by allowing users to receive payments without revealing their public addresses on the timechain. By using a combination of stealth addresses and key derivation techniques, silent payments make it significantly harder to track the flow of funds.

The power of Silent Payments lies in its ability to provide strong privacy guarantees while preserving the finality properties of on-chain Bitcoin transactions. Unlike off-chain solutions, Silent Payments operate directly on the Bitcoin timechain, allowing transactions to benefit from Bitcoin’s robust “technological settlement” model. This approach could significantly improve coin fungibility and resist attempts at transaction reversal.

Making Silent Payments a standard feature of bitcoin wallets will be challenging, as they impact the timechain size and cannot be implemented in thin clients. However, Silent Payments are the most promising way to improve settlement finality proposed to date.

The path forward

In order to build a monetary network that offers true final settlement, the Bitcoin community must prioritize privacy. This includes introducing more robust protocol-level privacy features, such as Silent Payments, and creating user-friendly privacy tools that make private transactions the default, not the exception. Education plays a crucial role in this process, helping users understand the importance of privacy to the long-term security of the Bitcoin they hold.

While Bitcoin’s technical properties provide a solid foundation for settlement, it is privacy that truly solidifies it. Without sufficient privacy, even the most energy-intensive consensus mechanism can be undermined by social, legal, or political pressure. Only when Bitcoin transactions are private can Bitcoin fully realize its potential as a revolutionary new form of money with true, irreversible settlement.

This is a guest post by Dave Birnbaum. The opinions expressed are entirely his own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.