Researchers have proposed a framework that could enable private Bitcoin payments without requiring changes to Bitcoin’s underlying protocol. The system is still incomplete, however, because it does not yet have a finalized process for depositing actual BTC or withdrawing it.

The research arrives as privacy-oriented cryptocurrencies such as Zcash attract renewed market attention. The 56-page paper, titled Shielded Bitcoin, was published Thursday by Clara Shikhelman, Mikhail Komarov and Aleksei Moskvin of cryptography firm [alloc] init.

The design is based in part on the encrypted payment architecture used by Zcash. Within Shielded Bitcoin, bitcoin-denominated funds would be represented as encrypted records called notes. When a note is spent, the system would publish a marker showing that it has been consumed and a cryptographic proof demonstrating that the spender owns the funds and has not created additional coins.

The payment amount, sender and recipient would remain hidden.

The main difference from Zcash is where the cryptographic verification occurs. Zcash checks these proofs directly on its blockchain, while Shielded Bitcoin would place the private transfer data on Bitcoin and have separate software perform the verification. This means Bitcoin could confirm a transaction even if the private payment contained within it did not pass the Shielded Bitcoin verification process.

The proposal comes as transaction privacy becomes more relevant for cryptocurrency applications ranging from payroll and business payments to everyday purchases. Standard Bitcoin transactions leave addresses and amounts permanently visible on the blockchain. Once an address is connected to a particular person or organization, transactions associated with it can become easier to trace.

Ethereum developers are also examining privacy-focused infrastructure through a proposal for a shared private pool. Such a system could allow ether and other tokens to be transferred without publicly exposing payment information, with payroll, treasury operations and donations cited as possible use cases.

Zcash and Shielded Transactions

Zcash offers users two types of transactions: transparent payments, which publicly display addresses and amounts, and shielded payments, which encrypt those details.

CoinDesk calculations using ZecStats data showed that shielded pools contained approximately 4.9 million ZEC on Friday, up 14% from July 30. The holdings represented about 29% of Zcash’s issued supply and were valued at roughly $7.8 billion after ZEC’s recent price increase.

The network processed approximately 63,000 shielded transactions last week. That marked its busiest period for private transfers since 2022 and its fourth-largest weekly total on record. Overall reported transfer volume surpassed $23 billion, the highest weekly figure since 2021 and the second-largest in Zcash’s history.

The increase in network activity has accompanied a sharp rise in investor interest. By early September, ZEC had gained more than 2,300% over the previous year and moved above $1,000. The token continued its advance, trading above $1,600 on Wednesday.

The technology behind Zcash’s privacy system has its origins in earlier attempts to add privacy to Bitcoin. Zerocoin was proposed in 2013 as a Bitcoin privacy extension. Further research produced Zerocash, which later evolved into Zcash, launched as an independent cryptocurrency in 2016.

Shielded Bitcoin would retain encrypted payment records on the Bitcoin blockchain. Users could reconstruct accepted private transactions from the public data using their wallet keys. Separate viewing keys could provide accountants or auditors with access to transaction details without giving them the ability to spend the associated funds.

The Missing BTC Bridge

A major unresolved issue is how ordinary BTC would enter the proposed system and how users would retrieve it later. The researchers said those mechanisms would be addressed in separate work involving PIPEs, a technology designed to keep a Bitcoin signing key locked until certain conditions are met.

The paper’s claim that users retain control of their funds applies to transfers within the Shielded Bitcoin system and does not cover deposits or withdrawals.

That limitation has prompted criticism from developers and members of the Zcash community.

Mert Mumtaz, co-founder of Helius and a Zcash supporter, described the proposal on X as a synthetic ledger with significant tradeoffs. He raised concerns about its trusted setup and the absence of fee anonymization, which could leave the Bitcoin wallet publishing the private payment identifiable.

He also questioned the absence of a protocol-level mechanism for depositing and withdrawing real BTC. Without such a mechanism, Mumtaz argued, users would effectively hold synthetic representations rather than native Bitcoin.

Mumtaz nevertheless acknowledged the researchers’ work and their use of concepts developed through Zcash. He said the proposed approach would need additional research and development before becoming a mature system.

Cypherpunk, a company involved in holding and mining Zcash, welcomed the research but said it did not view Shielded Bitcoin as a direct competitor to Zcash. The company said privacy is most effective when implemented at the base layer, while also noting that avoiding changes to Bitcoin represents both a major advantage and a significant limitation of the proposal.

The company added that additional privacy for Bitcoin could benefit the broader cryptocurrency industry.

The researchers at [alloc] init also identify several technical limitations. Their reference design depends on a cryptographic setup whose security requires at least one participant to act honestly. Transaction timing and fee payments would remain visible, while an efficient method for lightweight wallets to verify reconstructed payment histories remains to be developed.

Komarov estimates that a private Bitcoin payment would require around 700 virtual bytes, compared with roughly 100 to 200 virtual bytes for a conventional transaction. At the same fee rate, that larger size would translate into miner fees of approximately four times as much.

As of Friday, no launch date had been announced for Shielded Bitcoin.