Bitcoin was released in 2008 as an electronic peer-to-peer payment system. The aim was to enable financial transactions in an anonymous manner between participating parties. However, Bitcoin is considered a pseudonymous network rather than anonymous, as the identity of the address owner is unknown, but every transaction is permanently stored on the Bitcoin blockchain and can be tracked by anyone. The structure of the blockchain, its transactions, and the Bitcoin network make it possible to deanonymize pseudonyms through various methods such as flow analysis, heuristics, and network traffic observations. Once a connection is established between pseudonyms used in the Bitcoin network and the real world, all previous transactions can be attributed to that identity. In 2021, Taproot was introduced to further increase privacy within the Bitcoin Network by introducing a new address format which will allow transactions to be more indistinguishable from one another. In this paper, we analyze current methods for deanonymizing Bitcoin transactions to understand which parts of the Bitcoin protocol they exploit. In addition, we look at the changes introduced by Taproot and determine the extent to which these changes affect the methods and what assumptions must be made for these methods to remain applicable.
Bitcoin was released in 2008 as an electronic peer-to-peer payment system. The aim was to enable financial transactions in an anonymous manner between participating parties. However, Bitcoin is considered a pseudonymous network rather than anonymous, as the identity of the address owner is unknown, but every transaction is permanently stored on the Bitcoin blockchain and can be tracked by anyone. The structure of the blockchain, its transactions, and the Bitcoin network make it possible to deanonymize pseudonyms through various methods such as flow analysis, heuristics, and network traffic observations. Once a connection is established between pseudonyms used in the Bitcoin network and the real world, all previous transactions can be attributed to that identity. In 2021, Taproot was introduced to further increase privacy within the Bitcoin Network by introducing a new address format which will allow transactions to be more indistinguishable from one another. In this paper, we analyze current methods for deanonymizing Bitcoin transactions to understand which parts of the Bitcoin protocol they exploit. In addition, we look at the changes introduced by Taproot and determine the extent to which these changes affect the methods and what assumptions must be made for these methods to remain applicable.