One of Bitcoin’s not often discussed topics are PayNyms. However, it does have a lot to offer in terms of privacy.
What exactly are they and what can you do with them?
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Bitcoin and PayNyms
PayNyms solves this problem. It is a kind of bot that creates unique Bitcoin Compass addresses for people in your contact list. They don’t re-use addresses and they don’t reveal the payment history or balance of either party.
The PayNyms come from the stable of Samourai Wallet. It is based on the Bitcoin Improvement Proposal (BIP) 47. Another description is ‚re-usable payment codes‘. This technique is essentially a way of making payments anonymously.
It allows you to receive a payment from someone where the addresses of both parties are encrypted. This way you do not know to whom you are sending the money. You could see it as an anonymous payment channel.
„Your PayNym Bot is a memorable and friendly character uniquely generated from a hash of your BIP47 reusable payment code.
This way you can make a kind of address book of people in your close environment (like friends and family). Once you’ve set this up, you don’t have to ask the recipient for an address every time. A PayNym is all you need.
It is not recommended to use one address more than once. The blockchain is open and transparent, so connections can be made. Analysis companies can link addresses to each other. Reuse of addresses is therefore bad for the privacy of both the recipient and the sender.
You can create your own PayNym with a name, for example Satoshi Nakamoto, and it will contain a public key. Because you don’t want this public key to be linked to the PayNym, you use paymend codes and shared secrets under the hood. How this works is explained on GitHub.
Simply put, it works as follows: you make a Bitcoin transaction to a ‚watching or notification address‘. It’s not a real payment but an OP_RETURN output of 80 bytes. With this data, you can use an algorithm to create shared secret based on each other’s information (public key).
This ensures that with these secret keys temporary Bitcoin addresses can be created. Without the shared secrets, it is impossible to make connections between these payments. This way, a total of 232 payments can be made without having to manually request or create a new address each time.
So you can easily share a PayNym on your website or social media account to accept payments from anyone without reusing addresses.
There are few wallets that have implemented these PayNyms. For now the Samourai wallet is the only way to use it.