I don't see how that follows yet. Rolling back transactions or double spending is more than enough
You can't roll back transactions or double spend without producing blocks, and producing valid blocks don't get easier by isolating the victim from the network. If you agree that brute force attacks on proof of work isn't impractical, this isn't very viable either (i.e. people will realize there's something wrong when confirmation takes hours to days instead of minutes).
it is more work to create segmentation with leakage than without?
I don't get what you mean here. Even if a little information is leaked between the segments, the network will be whole again. Of course you have to have a reasonable leak. For instance, you could send the data on a flash drive and I wouldn't consider it a valid leak because of the latency.
In such a case, the difficulty of the attack must be reducible, or how can the rest of the world, which we are not communicating with (for long enough for me to defraud you) still be a factor in the CPU spend for the attack? Shannon will wake from his grave to hear the explanation.
Shannon would think you are being silly. :-)
The problem doesn't get easier to solve because less people dedicate work to it. Difficulty adjustments happen every 2016 blocks, but you can't make it lower without massively increasing confirmation times first and even then it can't go down below a certain coefficient.
Bitcoin is the least anonymous, most transparent currency ever invented. Nothing else in existence is more law-enforcement-friendly.
Bitcoin is pseudonymous. Addresses can only be connected to your identity through deliberate transactions. I have wallets that I know are impossible to be connected to me. But because of how Bitcoin works, it's very difficult to reason about, that's for sure. There is no foolproof way to achieve reasonable anonymity. However it's also ridiculous to say that it is law-enforcement-friendly.
From there on out I can see every transaction you have ever made with Y.
How come? Even with naive mixing, I don't understand what kind of technique you are suggesting here. With blind signatures, even the trusted parties don't know what goes where.
With surveillance of your net connection
Why am I so privacy conscious and still don't use a damned https connection? Most privacy conscious people use https over tor, both of which my mom is able to use by herself on an Android tablet.
wallet Y will be empty and wallet X will be full
I don't follow. We were assuming your identity is somehow well known, and you are trying to break the chain of transactions. Each time I need to make a private transaction, I can bounce it through a bunch of such services established in diverse jurisdictions. In turn, I can use the same technique to transfer back to my well known identity.
You have all the same problems as a traditional money launderer
Like having to hide cash inside oil barrels?
Anyone who wishes to perform anonymous transactions (the right of every hard cash holder since the invention of money) should run screaming from Bitcoin.
And run to what? Cash in mail?
As I explained, Chaum's scheme (i.e. a central party that can't track transactions) makes transactions perfectly untraceable. However it isn't widely used. I agree that current techniques people find good enough are not good enough (or maybe they are and I'm too paranoid). Even with blind signatures, we would need a lot of traffic to render it unfeasible as a honeypot.
It will take some practical proof to make people switch to such advanced methods however. Regardless of how we think, their techniques seem to be working.
Because the transaction data you need isn't in the chain.
If I cannot tell who owns what, then I can double-spend.
How do you know the money you sent through an escrow is yours? Exactly the same deal. There is a reality outside of Bitcoin.
As I said, Bitcoin makes such solutions more accessible, but it doesn't itself provide them. It's pretty similar to TCP/IP, which has nothing to do with anonymity by design, yet allows and enables it to a great extent.
I think you are looking for ideal solutions where no ideal solution is even theoretically possible. Bitcoin provides a high degree of Byzantine fault tolerance, and a reasonable degree of privacy. Its fault tolerance leads to inconveniences like long confirmation times, which can be traded with least tolerant more convenient solutions implemented on top of Bitcoin. In the same manner, you can increase privacy a great deal by jumping through some hoops.
so did the many security researchers that have been creating transaction graphs from it
I don't see the claim that only the data in the chain is necessary for a complete analysis in the paper. :-) Actually, they know the identities of those entities only through publicized external information.