After extensive research on Bitcoin, ironically, my first blog post isn’t about Bitcoin but about the Tor network (Tor Project)1. The Tor network is aptly named for its method of wrapping data packets in multiple layers, akin to the layers of an onion.

How Tor Onion Routing Works

graph LR
    A[Your Computer<br/>Bitcoin Node] --> B[Entry Guard<br/>Layer 3 Encryption]
    B --> C[Middle Relay<br/>Layer 2 Encryption]
    C --> D[Exit Relay<br/>Layer 1 Encryption]
    D --> E[Destination<br/>Bitcoin Peer]

    style A fill:#4CAF50
    style B fill:#FF9800
    style C fill:#FF9800
    style D fill:#FF5722
    style E fill:#2196F3

Key Privacy Features:

  • Entry Guard knows your IP but not your destination
  • Middle Relay knows neither source nor destination
  • Exit Relay knows destination but not your original IP
  • Each relay only decrypts one layer and sees next hop
Tor Project logo showing onion symbol representing layered encryption routing network

From what I understand, the Tor network has numerous relay stations around the world2. These volunteer-operated relays are responsible for transmitting the data packets we send. Before sending, however, the sender needs to know which relays are available. This information is likely stored on a server, including each relay’s public key generated by RSA (which has been deemed insecure in Tor version 3 and replaced with ECC). The private key, naturally, belongs to the relay itself for decrypting the data.

Diagram showing Tor relay network with volunteer nodes transmitting encrypted data packets globally

The next step involves requesting data from this server. Let’s say we request information on a hundred relays and randomly select ten. We then encrypt our data packet with each selected relay’s public key, layer by layer. Once the packet is fully encrypted, it’s sent through the Tor network. The outermost relay, which has the corresponding public key, receives and decrypts one layer, revealing the next relay’s public key, and so on, until the packet reaches its exit node. It’s important to note that each relay only knows its immediate predecessor and successor, making it incredibly difficult to trace the full path of the data.

Tor onion routing diagram showing layered encryption process through entry, middle, and exit nodes

In addition to explaining the packet transmission process within the Tor network, it’s worth discussing its vulnerabilities, particularly at the entry and exit points. The entry point, for an Internet Service Provider (ISP), marks the initiation of a Tor session. The exit point might be, for example, a packet headed to Facebook from the Tor network. This resembles Bitcoin’s money laundering process. Furthermore, packets at the entry point are usually encrypted with RSA public keys, while at the exit point, they’re mostly decrypted, often leaving only HTTPS encryption if the initial protocol was HTTP.

A common tool used to access the Tor network is the Tor Browser, a combination of Firefox and Tor. This browser can interpret .onion domains, which are not conventional IP addresses but paths to the destination. The Tor Browser can operate as a standalone Tor program, employing a local SOCKS5 proxy at 127.0.0.1:9050, essentially creating a local entry point to the Tor network. Since traditional browsers and apps use standard DNS resolution, the lack of .onion domain resolution isn’t unusual. You can also explore Bitcoin-related websites on the Tor network for enhanced privacy.

Frequently Asked Questions (FAQ)

Q: Why use Tor with Bitcoin transactions?

Using Tor with Bitcoin prevents your ISP and network observers from seeing that you’re running a Bitcoin node or initiating transactions. Without Tor, your real IP address is visible to peers in the Bitcoin network, potentially linking your identity to your Bitcoin addresses and transaction history.

Q: How does Tor’s onion routing protect Bitcoin privacy?

Tor encrypts your Bitcoin network traffic in multiple layers and routes it through volunteer relay nodes worldwide. Each relay only knows the previous and next hop, making it nearly impossible to trace the connection back to your original IP address, effectively anonymizing your Bitcoin node activity.

Q: What are the vulnerabilities of using Tor with Bitcoin?

The main vulnerabilities are at entry and exit nodes. Your ISP can detect that you’re connecting to the Tor network (but not what you’re doing), and exit node operators can potentially see unencrypted traffic. However, Bitcoin Core’s built-in Tor support mitigates these risks by keeping traffic within the Tor network.

Q: How do I configure Bitcoin Core to use Tor?

Bitcoin Core includes native Tor support. Enable it by adding -onion flag in your configuration or through the GUI settings (available since version 0.12.0). The software automatically creates a hidden service, allowing your node to receive connections anonymously via a .onion address.

Q: Does using Tor slow down Bitcoin synchronization?

Yes, Tor routing adds latency since traffic passes through multiple relay nodes. Initial blockchain synchronization may take longer, and you may experience slightly delayed transaction broadcasting. However, the privacy benefits often outweigh the performance trade-off for users prioritizing anonymity.

Conclusion: Tor routing makes it more difficult for ISPs to track users, a feature beneficial for Bitcoin transactions to prevent ISPs or hackers from seeing the transaction’s origin. Although Bitcoin addresses might indicate the transaction initiator, the lack of encryption during Bitcoin’s data transmission makes it vulnerable to tampering. However, there have been proposals for HTTPS-based blockchain synchronization mechanisms in Bitcoin Improvement Proposals (BIP)3. The current Bitcoin Core 4 also supports Tor network options.

  • #4587 0c465f5: Allow users to set -onion via GUI (Diapolo)

References

  1. Tor ↩

  2. Tor Atlas ↩

  3. Bitcoin Improvement Proposals ↩

  4. Bitcoin Core Releases ↩