Bitcoin Layer 2s Poised to Unlock New Privacy Design Space with Self-Custody Focus

Muneeb Ali, co-founder of Stacks, a prominent Bitcoin Layer 2 solution, recently outlined a vision for enhanced privacy on Bitcoin through advanced Layer 2 (L2) implementations. Ali asserted that while Bitcoin's base layer is unlikely to incorporate native privacy features, L2s with full virtual machines (VMs) could introduce stealth Bitcoin (BTC) addresses, provided they achieve full self-custody. This development could significantly expand the utility and privacy of BTC transactions.

"Bitcoin will likely never add privacy at the base layer. However, if BTC on L2 can be fully self-custodial, then the L2s can add stealth BTC addresses (if they have full VMs)," Ali stated in a recent social media post.

The core technical challenge, according to Ali, lies in guaranteeing that L2 BTC remains entirely self-custodial. This means users must always be able to retrieve their BTC, even in the event of an L2 failure. This commitment to self-custody aligns with Bitcoin's foundational principles of decentralization and user control, distinguishing it from centralized wrapped BTC solutions.

Ali also addressed concerns regarding information leakage during the bridging process from Layer 1 to Layer 2. He noted that moving funds from a public address to a stealth address inherently involves some information disclosure. In his proposed design, the public address would reside on Bitcoin's Layer 1, while the stealth address would operate on the L2, offering enhanced privacy for transactions within that layer.

Once fully self-custodial and programmable BTC is achieved on L2s, a new design space for privacy solutions is expected to emerge. This innovation could enable more sophisticated and private financial applications built on Bitcoin, leveraging the security of the base chain while providing the flexibility and privacy features currently lacking. Stacks, under Ali's leadership, has been actively developing technologies like the Nakamoto upgrade and sBTC to bring smart contract functionality and programmability to Bitcoin, laying the groundwork for such privacy advancements.