What are Bitcoin mixers, and why do exchanges ban them?

One of the original attractions of cryptocurrency is the narrative that its use provides the sender or recipient anonymously, but this is a common misconception within the industry.

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

Proof of this came earlier this week when on April 27, US authorities arrested the brain of Bitcoin Fog, a darknet-based BTC mixing service. Authorities were able to capture the operator after analyzing ten years of blockchain data.

One does not need to be a forensic analyst to know that every transaction is tied to addresses on the blockchain and that they will remain there forever. While government agencies cannot determine the IP address or personal data of the address, these coins generally end up being used for products or service payments. This is the trail that leads back to the sender and recipient.

In the case of Bitcoin Fog, law enforcement was able to identify server hosting expenses paid with digital currency. Bitcoin mixing services like Bitcoin Fog allow users to mix their coins with other users, making it almost impossible to detect destination addresses. This obfuscates the links between inputs and output addresses, providing a better level of privacy.

Mixing services are offered in a wide range of methods, including fully centralized solutions where trust is required, for Coinjoin mixers, which rely on a large group of users to self-cooperate and act simultaneously. There is even the possibility of trading on decentralized exchanges (DeX) to virtually eliminate any possible tracking.

Mixers present some risks
Centralized mixers offer the obvious single point of failure problem. Even if one trusts that the entity is using multisig addresses, if the service is willing to share their data or has been breached, its users will lose their privacy.

CoinJoin solved this problem by combining the entries of several users into a single transaction. The service will then take those coins, convert them into a transaction and have each participant sign before transmitting them to the network. These transactions are merged into one, and each user gets the original amount in return. However, no one can see the origin of those currencies, not even the entity merging the transaction.

Even though CoinJoin isn’t exactly untraceable, it provides plausible denial, as no one can pinpoint which entity owns each exit. The greater the number of participants, the greater the degree of denial.

Wasabi Wallet CoinJoin screenshot feature. 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 functionalities.

While its infrastructure is technically centralized, its design ensures that operators cannot de-anonymize users or steal funds. At the moment, the wasabi wallet is only available for desktop solutions, so as is the case with anything in cryptocurrency, beware of clones!

A similar service is provided by Samourai wallet, which also offers a Chaumian CoinJoin mixing service, called Whirlpool. To achieve a complete privacy solution, users have to connect the Samourai Wallet to their own full Bitcoin node. However, it offers both desktop and mobile versions.

Even though these mixing services are not illegal in most jurisdictions, some exchanges and services may reject users linked to addresses associated with coin mixing activities.

As more people realize the importance of achieving a certain degree of privacy for self-protection, fewer incentives will have companies to deny their customers the use of mixers.

Leave a Reply

Your email address will not be published. Required fields are marked *