The cryptocurrency industry was initially headlined as anonymous digital cash. While experts were keen to point out that this was not exactly the case, Bitcoin (BTC) found initial popularity in darknet markets such as Silk Road, where merchants sold illegal goods ranging from light drugs to, allegedly, hitman services. Founded in 2011, Silk Road thrived for the next two years until the Federal Bureau of Investigation shut it down in 2013. Authorities later revealed that completely free blockchain explorers aided their investigative efforts.
Bitcoin’s transaction ledger is completely open for the public to view. What the blockchain does lack is openly available identity data, as all transactions are conducted between wallet addresses, which can be considered pseudonyms. However, each wallet address is unique and can be tied to specific people or entities.
Mapping an address to its holder can be as simple as making a transaction. A buyer and seller can potentially reveal their entire transaction history to each other. Though they may not know with whom they’ve transacted previously, they can know the balance and spending amounts through a simple check on a blockchain explorer. In technical terms, this is called linkability: how easy it is to reconstruct a particular chain of transactions.
Bitcoin’s chain of transactions is theoretically easy to link. In practice though, this is not a trivial task, as it can be complicated to determine which part of a Bitcoin transaction is the change and which is the actual money that was spent.
Bitcoin-based privacy solutions
Given the explicit privacy weakness of Bitcoin and other open ledgers, various remedy solutions have been developed over the years. The first was proposed in early 2013 by Gregory Maxwell, a core Bitcoin developer. Later dubbed CoinJoin, the technology utilized an already existing principle of Bitcoin that single transactions can contain many “outputs” and “inputs” that flow to and from multiple wallets.
Each transaction takes a certain amount of Bitcoin in the form of inputs and reshapes it, like clay, into different chunks of outputs. With CoinJoin, multiple participants offer their Bitcoin into a single transaction, which then reshapes them into different outputs that are sent to the wallets specified by each user.
The result is that the chain of transactions is scrambled: an external viewer tracking wallet A doesn’t know to which exact wallet B the Bitcoin was sent to. Wallet B may contain Bitcoin pieced together from dozens of input wallets. The amount of participants, called the anonymity set, is important for the overall strength of mixing. It’s much more difficult to track one wallet out of 10,000 than one out of 10.
Another solution was given by Bitcoin mixers. Though they utilized a similar approach, they were centralized services that held custody of the Bitcoin during the scrambling process. Nevertheless, mixers initially proved popular for users as they were much simpler to implement than the peer-to-peer CoinJoin.
Their security flaws were soon made evident by researchers. A December 2017 paper by Felix Maduakor demonstrated a fairly simple heuristic process to deanonymize mixer transactions. The algorithm relied on factors such as timing, Bitcoin transaction amounts and their corresponding fees to filter the destination wallet. In addition, one service had a simple web-based vulnerability that could leak all mixed transaction data by exploiting internal record keeping. A different 2017 paper also concluded that even the most popular mixers utilized poor security practices that made it easy to trace their operations.
Despite the significant security flaws, mixers continued to be popular well into 2018. However, police seizures and voluntary closures pressured the sector and may have finally helped to curb their use. As Chainalysis noted in a July 2019 webinar, CoinJoin-based wallets offered by Wasabi and Samourai steadily gained popularity during 2019, processing over $250 million in Bitcoin.
Some mixing services took it a step further with CoinJoin and implement an extra step in the process. By creating a new wallet to receive the coins after a mix and deleting the wallet after the funds are taken out would provide plausible deniability in terms of proving that the temporary wallet belongs to someone. This extra step is done for you with mixers like Cryptmixer, while others like Chipmixer shows you how to do this process yourself.
To secure privacy and security of your Bitcoin, always have a cold storage wallet with tumbled coins and keep it in a safe place. With places now demanding all your info to use your Bitcoin, services like cryptmixer are there to keep what’s yours private. We have a big year coming up for Bitcoin and it’s in your best interest to make sure your holdings are safe.