State of the transaction privacy work in Bitcoin

The WabiSabi coinjoin protocol represents a significant advancement in the anonymization of Bitcoin transactions, particularly when compared to its predecessor, Wasabi 1. The protocol introduces improvements that address the issue of transaction denominations, which is critical for practical usage of bitcoins in making payments. However, despite these enhancements, the problem of denomination splitting remains not entirely resolved, indicating that while WabiSabi is innovative, it does not fully overcome the challenges associated with transaction denominations in Bitcoin operations.

A central issue with using coinjoin protocols, including WabiSabi, is their reliance on a central server. This dependency introduces vulnerabilities, notably the risk of Sybil attacks by the server itself. Although there are inherent protections such as the ability to probe the server anonymously, the threat of such manipulations cannot be completely eliminated. Additionally, the scalability of coinjoin protocols is limited. While they can provide significant anonymity for large sets of transactions (large anon sets), this does not scale well and smaller anon sets do not offer robust anonymization.

There are also several other challenges associated with maintaining privacy in on-chain Bitcoin transactions. Techniques like timing correlation, amount correlation, wallet fingerprinting, and network-level tracing combined with other types of metadata analysis undermine the effectiveness of on-chain privacy measures. Despite the advancements in protocols like WabiSabi, these issues suggest that claims of achieving complete on-chain privacy are overly optimistic. In contrast, off-chain solutions might present a more viable option for claiming enhanced privacy and security in cryptocurrency transactions.