Avoiding Address Reuse (cont.)

[InteXX]

This is a follow-up post from my original, over here. Unfortunately, that one was closed before I got a chance to actually discuss things with anyone. I still have unanswered questions, as the conversation suggests.

Being new here, I'm unfamiliar with the practices of the community; will it be possible to leave this new discussion open until I'm comfortable with its resolutions? I promise I won't leave it to linger afterward, and that I'll close it myself in a timely manner.

There seems to be a contradiction. Granted this may be due to my infancy in understanding crypto tech, so if so I'm hoping someone can set me straight. But if on the other hand I AM correct, maybe someone can confirm.

The apparent contradiction is between what the narrator states in the guidance video:

The first thing you need to do is add a derivation scheme to your wallet. This is the public key of your wallet. Whoever has access to this key cannot access your funds, but they can see all the addresses that your wallet has.

...and @Kukks' reply:

BTCPay Server handles this internally automatically

In fact, the reply itself seems ambiguous. Handles what internally, exactly? Not reusing wallet addresses or creating a new wallet for every transaction? Or are those two essentially the same thing? (It's also worth noting that I was fully aware when I posted it that my VB.NET code is unrelated to BTCPay. That's not the point I was trying to make. I was merely trying to invite rich discussion, for and against various ideas and concepts.)

Here's what I fear:

An attacker can discover the amount of funds in my wallet(s) and thereby determine whether he wishes to attempt a break-in.

Please don't hit me with a fire-and-forget. I really would like to understand this better and to meaningfully engage with folks who know a whole lot more about all of this than I do. I really would like to have a discussion.

Thank you.

[dennisreimann]

Handles what internally, exactly?

Importing a wallet into BTCPay Server basically means importing the wallet's extended public key (xpub). Based on this key, BTCPay can generate unique addresses per invoice, know which ones have been in use already and manage everything accordingly, so that you don't have to manually care about that.

Not reusing wallet addresses or creating a new wallet for every transaction? Or are those two essentially the same thing?

Those aren't the same thing. The wallet is imported or generated once, and addresses for that wallet are generated as descrived above.

[InteXX]

@dennisreimann

Your answer, especially your use of the jargon xpub, has led me in what looks like the right direction. Thank you.

I keyed off of that and asked ChatGPT a few questions. Do you agree with the answers?

What is a bitcoin wallet's xpub?

A Bitcoin wallet's xpub, or extended public key, is a part of the hierarchical deterministic (HD) key generation system used in Bitcoin and many other cryptocurrencies. The xpub is derived from the wallet's master public key and is used to generate a series of public keys for receiving funds. It allows for improved privacy and security when generating new receiving addresses without exposing the private keys associated with the wallet.

Is a given wallet's balance publicly visible?

The balance of a Bitcoin wallet is not publicly visible in the sense that it's tied to a specific wallet address, and the wallet address itself doesn't reveal the balance. However, the Bitcoin blockchain is a public ledger, and all transactions are recorded on it. Anyone can see the transaction history and the total amount of Bitcoin associated with a particular wallet address.

So, while the balance of a wallet is not directly exposed, a determined individual could trace the history of transactions associated with a specific wallet address to infer its current balance.

It's important to note that some privacy-focused wallets and techniques, such as CoinJoin and the use of multiple addresses, aim to obfuscate the connection between wallet addresses and provide greater privacy.

If I were to create a completely new wallet for every transaction, would that solve the problem of publicly visible balances?

Creating a new wallet for every transaction, or more precisely, creating a new receiving address for every transaction, is a technique known as "address reuse avoidance." While it can enhance privacy, it doesn't completely solve the problem of publicly visible balances but significantly mitigates it.

Here's how it works:

1. Enhanced Privacy: By using a new address for each transaction, you make it more challenging for someone to link your transactions together, enhancing your privacy.
2. Reduced Exposure: Each address is like a separate "account," and your balance is not publicly visible in one place. Instead, it's distributed across multiple addresses.
3. Weakened Linkability: It becomes harder for observers to link your different transactions together, making it more challenging to determine your overall financial activity.

However, it's important to keep in mind a few things:

1. Blockchain Analysis: Advanced blockchain analysis tools and techniques may still be able to link transactions if patterns or clues exist. Complete privacy is challenging to achieve.
2. Managing Multiple Addresses: Managing a large number of addresses can be complex. You need to ensure you don't lose access to your funds or forget which address received which payments.
3. Wallet Compatibility: Not all wallets easily support creating new addresses for every transaction, so you need to choose a wallet that allows for this practice.

In summary, using a new wallet address for every transaction is a useful privacy practice, but it's just one element of a broader strategy for enhancing privacy in cryptocurrency transactions. It doesn't provide absolute privacy, but it does make it significantly harder for others to track your financial activity on the blockchain.

Can an individual see all of a wallet's receiving addresses if he has only one of them?

No, if an individual has one of the receiving addresses associated with a wallet, they (sic) cannot automatically see all of the other receiving addresses of that wallet. Bitcoin addresses are not directly linked to each other within a wallet. Each address is generated independently, and there is no inherent information within a single address that reveals the existence of other addresses in the same wallet.

However, it's worth noting that advanced blockchain analysis techniques may allow someone to infer that multiple addresses belong to the same wallet if they observe patterns of transactions or if the user uses a common change address. Nevertheless, without further information, simply having one address does not provide insight into the other addresses associated with the same wallet.

Can one see them if one has the master public key of the wallet itself?

If one has the master public key (xpub) of a wallet, one can derive all the receiving addresses associated with that wallet. The master public key is used in a hierarchical deterministic (HD) wallet to generate a sequence of child public keys, which in turn are used to create receiving addresses.

With the master public key, one can generate all the child public keys and their corresponding addresses. This is a feature of HD wallets designed to simplify address management and improve privacy.

So, if someone has the xpub of a wallet, one can indeed derive and see all the receiving addresses linked to that wallet, even if one only possesses one of those addresses. However, one would not have access to the private keys associated with those addresses, so one wouldn't be able to spend the funds from those addresses.

Can the xpub be determined from one of the child keys?

No, it is not possible to determine the master public key (xpub) from one of the child public keys or receiving addresses. The hierarchical deterministic (HD) wallet structure is designed in a way that makes it computationally infeasible to derive the master key from a child key. The child keys are derived from the master key using a one-way function that doesn't allow for reverse engineering.

So, having one of the child keys or addresses does not provide any information about the master public key or the xpub used to generate the entire wallet structure. This property helps maintain the security and privacy of the wallet.

If you do, and assuming BTCPay doesn't reveal the xpub, it looks like BTCPay --> Hardware Wallet --> Monero, all on a VPN, is going to be the best bet for reducing exposure to would-be attackers.

Agreed?

Further commentary is welcome. Your ideas are valuable to me.

[dennisreimann]

If I were to create a completely new wallet for every transaction, would that solve the problem of publicly visible balances?

You do not need to create a new wallet per transaction, your use case is solved by providing the xpub.

assuming BTCPay doesn't reveal the xpub

It doesn't reveal it publicly, yet it has to be saved in the database/on the server — keep this in mind when choosing a deployment strategy and host.

[InteXX]

Very good, thank you. Keep up the good work!

(I'll leave this open for a day or so in case someone else wants to chime in.)

[InteXX]

BTCPay --> Hardware Wallet --> Monero

Would you tend to agree with that as a standard good security/privacy practice?

[InteXX]

Also: can you spot anything in that litany where ChatGPT got it wrong?

[dennisreimann]

Would you tend to agree with that as a standard good security/privacy practice?

To me it is more like this, but possibly you mean the same thing:

Hardware Wallet --> xpub --> BTCPay --> Earn bitcoin

Also: can you spot anything in that litany where ChatGPT got it wrong?

The "create a completely new wallet for every transaction" answer is messed up and should not be seen as useful guidance. It looks like it didn't even distinguish between "wallet" and "wallet address".