Babilonia - probabilistic coinjoin and covert betting

The recent analysis reveals a critical flaw in the assumption that payment transactions within certain betting structures do not create distinguishable fingerprints on the blockchain. This misconception stems from the belief that the transaction involving the payout to the winner does not stand out compared to general payment transactions, especially when the extra incentives (pot sweeteners) are minimal. However, it becomes evident that the payout amount is notably correlated with prior transactions between the involved parties.

In a given scenario where Alice and Bob participate in a bet, Alice inputs 10 units while Bob inputs 5. Following the bet's conclusion, if Bob wins, the transaction structure specifically outlines the payout, splitting the total into parts where Bob receives winnings directly proportional to his initial stake minus his change. This proportionality inadvertently creates a predictable pattern, making it possible for blockchain analysts to identify these transactions based on repeated integer multiples of the bets, despite network fees and minor variations.

To address this vulnerability, a sophisticated method involving bet aggregation has been proposed. By aggregating multiple distinct bets into a single transaction, it is possible to obscure the predictable patterns typically seen in simpler betting structures. This method leverages the variability in outcomes across numerous games to mask the individual transaction details effectively. For instance, integrating ten separate bets into one can vary the payout ratios extensively, thus eliminating any specific predictable fingerprint.

Moreover, employing technologies like PTLCs (Point Time-Locked Contracts) could further enhance privacy but are currently not feasible. An alternative approach discussed involves creating a shared control UTXO that feeds into multiple outputs, each corresponding to a potential outcome of different bets. This setup allows for varied distributions of winnings, which can be predetermined off-chain, thereby maintaining the randomness and privacy of the payouts.

This new structural approach to betting transactions holds promise for enhancing privacy on the blockchain. However, it introduces complexities in the transaction process and limitations in scalability, particularly noted in scenarios where very high numbers of aggregated bets are considered impractical due to associated fees. Revisions and updates to the supporting documentation and protocols will be necessary to refine and implement these strategies effectively, ensuring they are both practical and secure for broader use.