Tornado Cash, CoinJoin are service platforms that have “mixed” a lot of cryptocurrencies recently. Most of these ecosystems are secure and decentralized protocols, mainly used for legitimate applications.
Unfortunately, they also have their dark side of the coin. Some of them serve hackers for money laundering and illegal transactions. Today we’re going to take a look at serving protocols mixing cryptocurrencies. What are they, how do they work – we will answer all your questions?
Coin Mixing – what is it?
The name itself suggests a lot. Coin Mixing is a service that allows us to “mix” cryptocurrencies. That is…? That is, to hide their origin and destination of the transaction. The user sends their crypto to the appropriate ecosystem (e.g. Tornado Cash), orders him to mix these coins with other tokens, or cryptocurrencies. Then he sends the mixed cryptocurrencies to the recipient’s address, which is also hidden.
At this point, you can consider the legitimacy of such an action. Like everything, it has its pluses and minuses. Imagine that you don’t want your spouse to know card details, transactions performed, things you bought. Then, in our opinion, the use of such an ecosystem is a plus.
However, every stick has two ends. As we mentioned earlier, there is also a dark side to the coin. Ecosystems Coin Mixing that mix coins are an attractive tool for hackers and cybercriminals. Cryptocurrency mixers are a bit of a gray area that makes it easier in money laundering while ensuring anonymity. It is worth mentioning that criminals using Tornado Cash for money laundering, they siphoned off over USD 7 billion from the cryptocurrency market.
CoinJoin – what is it?
While on the subject of cryptocurrency mixers, we cannot mention CoinJoin. It is a protocol that improves the privacy and anonymity of users in Bitcoin. How does it work? It unifies all transactions in one chain, which are basically carried out by different users of the system. This way, when all transactions have been standardized, absolutely none of the users can determine where the funds are coming from. Transaction inputs and outputs using the protocol CoinJoin are not visible. In this way, even the recipient of the transaction cannot determine where his transferred funds went.
Is it useful to include this protocol in a given ecosystem? Again, we will tell you that it has its pluses and minuses. It definitely allows you to avoid tracking received funds or payments that have been made in the Bitcoin system. Let’s remember that Bitcoin is private but not anonymous. Such a short reminder for people who particularly value privacy.
Correct use of CoinJoin makes it virtually impossible to track Bitcoin users. Moreover, the protocol is technically superior to any crypto mixers. Why? CoinJoin works as a P2P protocol, while mixers are largely centralized and vulnerable to fraud.
Cryptocurrency mixer – how does it work?
Cryptocurrency mixers use smart contracts to accept cryptocurrency deposits from an address and allow their withdrawal from yet another address. In smart contracts, they act as a pool where deposited assets are mixed. When funds are withdrawn from this pool, the on-chain connection between the source of the transaction and the destination is broken. This action ensures the anonymity of the transaction.
For services of this kind, you should be aware that no one controls the ecosystem. There are no third parties to check your wallet and funds. We have smart contracts. And since we don’t have a middleman here, mixer services are extremely neutral. Which also makes them tempting for cybercriminals.
How does CoinJoin work?
To transact using this protocol at all, we need a few other network users. Without other addresses, and basically people with funds who will want to “mix” with us, the use of the protocol will be impossible.
It is worth noting here that by focusing transactions into one, you do not give control of your funds to one person or entity. It’s completely the other way around. In Bitcoin CoinJoin, the signatures of individual transactions are independent of each other. Oh, such a curiosity.
If a group of users wants to transact using the protocol, each of them will have control over the input and output data. The transaction will only be signed if users agree with it, and it is valid. Until Bitcoin CoinJoin does not obtain the signatures of all entities mixing cryptocurrencies, the transaction will not take place.
However, when we obtain the signatures, they will be grouped in the same (one) transaction CoinJoin. It will then be processed and approved by miners to be included in the blockchain. Yes, will be reflected as a single, but will not show where the funds are coming from or where they are being sent.
We wouldn’t be ourselves if we didn’t leave you some interesting facts at the end ☺
CoinJoin protocol uses the schema UTXO or so-called unspent Bitcoin coins. To use them to generate a pattern of entries for the same transaction. A CoinJoin payment is made when all people sign the transaction and agree to the balances it presents.
Are crypto mixers the only option?
No. Even though hackers will use cryptocurrency mixing services, they still have to transfer these stolen funds through multiple exchanges using purchased or stolen accounts. The method is known as chain-hopping.
In addition to cryptocurrency mixers, we can use privacy coins for fully anonymous transactions. It is an anonymous power. With their use, the government or even third parties cannot spy on financial transactions. We are talking about Monero or Zcash here, which uses Zero Knowledge Proof. Private coins effectively hide the flow of funds. Monero, uses one-time “stealth” addresses and mixes real transaction signatures with decoys. Zcash is based on zero-knowledge proofs that do not share transaction information.
Coin Mixer – pros and cons
- If law enforcement knows the address of the first money laundering suspect, then linking the money flow is not difficult.
- They ensure full anonymity of operation.
- Some exchanges do not allow mixed cryptocurrencies to enter or leave exchanges. We are talking here, for example, about Binance.
- Not all cryptocurrency mixing services are legal.
- Some mixers are not very effective at hiding transactions.
- Cryptocurrency mixers are a common tool used by hackers and cybercriminals for money laundering or Dark Web activities.
Advantages and disadvantages of CoinJoin
- Increases the privacy of our crypto operations.
- It doesn’t need protocol changes to work. Maintains compatibility with Bitcoin and users.
- It can mix legal Bitcoin with illegal.
- Analysis of CoinJoin identity data may reveal your information.
Summary
Protocol CoinJoin or a cryptocurrency mixer? The choice depends on our personal preferences. Of course, cryptocurrency mixing tools are an important addition for users who are meticulous about anonymity. However, for those who prefer its verifiable forms, it will definitely be a better option to CoinJoin.
Remember to do your research and discernment before any such action.
