Mercury Wallet pitches itself as Bitcoin’s answer to scalability, privacy

Software engineer and privacy advocate Nicholas Gregory recently sat down with CryptoSlate to discuss Bitcoin privacy and the evolution of the privacy-focused Mercury Wallet.

The talk was particularly relevant in light of recent events at Tornado Cash, which have fueled debate about Bitcoin’s superiority, at least from a censorship resistance standpoint.

With the merger fast approaching, censorship risk remains an unresolved issue for Ethereum investors. Especially as the move to Proof-of-Stake potentially further exposes the protocol to compliance sanctions, but this time via stake validators.

While Bitcoin is not 100% immune to censorship risks, such as risk exposure via CoinJoin or the Lightning Network, the general feeling is that Proof-of-Work mechanisms remain more robust when it comes to operating trustlessly.

Tornado Cash fallout reiterates the importance of privacy

The US Treasury Department added Tornado Cash to its Office of Foreign Assets Control (OFAC) list on August 8. Officials alleged that the crypto mixer was responsible for laundering over $7 billion in illegal tokens since 2019.

The fallout saw Tornado Cash’s USDC wallets blacklisted, its developers bootstrapped by Github, and its website taken down. Addresses that interacted with the blacklisted wallets were also flagged to add insult to injury. Tron founder Justin Sun tweeted that Aave had blocked his account after a malicious prankster sent him 0.1 ETH from a Tornado Cash address.

This sledgehammer approach was intended to isolate Tornado Cash and penalize any entities that had used the protocol. But, as the non-profit organization Coin Center pointed out, the sanctions were a gross overreach of legal authority that potentially violated human rights and freedom of expression. More so, like the Protocol, being a neutral tool does not fit the definition of a sanctionable person.

“This action potentially violates constitutional rights to due process and free speech, and that OFAC has not acted adequately to mitigate the foreseeable impact the action will have on innocent Americans.”

Critics further argued that the OFAC actions also assumed that every Tornado Cash user had criminal intent. Still, Ethereum’s co-founder Vitalik Buterin said he used the protocol innocently when donating to the Ukrainian fundraiser.

Statechain technology for privacy

With that, protecting privacy in the face of government overreach becomes all the more important, and Gregory believes he may have the solution in the Bitcoin Statechain technology on which Mercury Wallet is built.

Statechain is a Bitcoin layer 2 solution that focuses on improving transaction privacy. Like the Lightning Network, it works by moving transactions from the main chain to its own chain to enable instant and cheap private transactions.

“However, with statechains, 2 private keys are required to sign the transaction, with one private key belonging to the user and the other private key belonging to the provider of the statechain (eg Mercury Wallet).”

Mercury Wallet essentially never manages or controls funds. Instead, value is transferred by giving the receiver the private key to the sender’s wallet. Under this system, the amount of Bitcoin sent in a transaction is fixed when a user creates the Statechain (UTXO), meaning it cannot be split into several different amounts.

“For example, if you want to send 1 Bitcoin in a transaction to a friend (lucky them) and you create a statechain, you cannot send 2 x 0.5 BTC transactions, it must be 1 x 1 BTC as it is UTXO which defines the amount to be sent.”

However, users must trust that the Statechain provider is not cooperating with the previous private key holder. Based on maintaining the reputation of Statechains, the above scenario is considered unlikely. Especially since each transaction has a different private key, and the bad actor would need all previous users to agree to defraud the system.

Nicholas Gregory discusses privacy developments in Mercury Wallet

By developing Statechain technology and creating the Mercury Wallet, Gregory said it was done to make Bitcoin easier to use “in terms of scalability and privacy.”

Discussing the Mercury Wallet with CryptoSlate, Gregory pointed out that the way it works breaks the principle of “not your keys, not your coins”, which he finds highly entertaining.

“Mercury Wallet is an alternative scaling solution. What I like about it from an entertainment point of view is that it breaks one of the foundations of Bitcoin – not your keys, not your coins. Well Mercury lets you pass around private keys.”

Nevertheless, he himself admitted that “not many people know about it,” and the project also suffers from low liquidity.

To address these issues, the wallet developer said the team wants to broaden Mercury Wallet’s appeal by making it “blind.” This means that the protocol will not know the details of transactions passing through the system, and it will then be impossible to collect data.

“The blind means we don’t know what we’re doing, which is great from a regulatory point of view in that we won’t be able to collect any data.”

To kick-start liquidity, Gregory said plans are in place to sell Statechains paid with Bitcoin to bring more liquidity into the network. Statechain buyers will be given “Statecoins”, which represent the Bitcoin held in Statechain.

This will add more liquidity to the protocol and enable Sidechain owners to trade the value of their Bitcoin holdings without interacting with the main chain.

Gregory hopes these changes will be enough that when Bitcoin Layer 2 is mentioned, Statechains are on equal footing with the Lightning Network.