What are bitcoin mixers and why are exchanges banning them?

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One of the original charms of cryptocurrency is the narrative that its use makes the sender or recipient available anonymously. However, this is a common misconception within the sector.

In reality, Bitcoin (BTC) and many other cryptocurrencies are easily traceable.

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Evidence of this came earlier this week when U.S. authorities arrested the mastermind of Bitcoin Fog, a Darknet-based mixed BTC service, on April 27th. The authorities were able to record the operator after analyzing the blockchain data for ten years.

You don’t have to be a forensic analyst to know that every single transaction is tied to addresses on the blockchain and that they will stay there forever. While government agencies cannot determine the IP address or personal information from the address, these coins are typically used for product or service payments. This is the path that leads back to the sender and recipient.

In the case of Bitcoin Fog, law enforcement agencies were able to determine the server hosting costs paid for with digital currency. Bitcoin shuffling services like Bitcoin Fog allow users to shuffle their coins with other users so that the destination addresses are barely recognizable. This obscures the connections between the input and output addresses and provides a better level of data protection.

Example of a mixed transaction. Source: TarushTech-Medium

Mixing services are offered to coinjoin mixers who depend on a large group of users to self-collaborate and act at the same time in a variety of methods, including fully centralized solutions where trust is required. It is even possible to trade on decentralized exchanges (DEX) in order to practically rule out possible tracing.

Mixers come with a number of risks

Central mixers present the obvious single point of failure problem. Even trusting the entity to use multisig addresses if the service is ready to reveal its data or if it has been breached, its users will lose their privacy.

CoinJoin solved this problem by merging the input of multiple users into a single transaction. The service then takes these coins, processes them into a transaction and has each participant sign before sending them to the network. These transactions are then merged into one and each user gets the original amount back. However, no one can tell the origin of these coins, not even the entity that is bringing the transaction together.

While CoinJoin isn’t exactly traceable, it offers a plausible denial as no one can point out which entity each issue owns. The greater the number of participants, the higher the degree of denial.

Screen capture of the Wasabi Wallet CoinJoin function. Source: WasabiWallet

Some cryptocurrency users also require anonymity to send tokens to their wallets, and Wasabi Wallet has long been used for its embedded CoinJoin functions.

While the infrastructure is technically centralized, the design ensures that operators cannot decanonymize users or steal funds. At the moment the Wasabi wallet is only available for desktop solutions. So, as with all cryptocurrencies, watch out for clones!

A similar service is offered by the Samourai wallet, which also offers a Chaumian CoinJoin blending service called Whirlpool. For a complete data protection solution, users need to connect the samourai wallet to their own full bitcoin node. However, desktop and mobile versions are offered.

Although these shuffling services are not illegal in most countries, some exchanges and services may reject users associated with addresses associated with coin shuffling activities.

The more people realize the importance of achieving a level of privacy for self-protection, the less incentive companies need to prevent their customers from using mixers.

The views and opinions expressed are those of the author only and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading step is associated with risks. You should do your own research when making a decision.