The necessity of using crypto mixers has been recognized since the invention of Bitcoin itself. Cryptocurrencies are often used by people who value privacy and security, so the need for additional protection measures is self-explanatory. Transparency is one of the basic principles of how blockchain works, so anyone knowledgeable enough can view the transaction logs.
Naturally, unlike a bank account or a credit card, a cryptocurrency wallet is not tied to the user’s identity, because no identifying documents are required to create one or more crypto wallets. However, malicious third parties can use transaction data to determine targets for cyber-attacks or scam attempts. Bitcoin mixers provide protection against transaction analyzing, making your crypto operations literally untraceable. As a result, it becomes impossible to calculate or otherwise find out the source and the target addresses of your transactions. This is immensely useful if you value your privacy.
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The Basic Principles of Coin Mixers
But how do coin tumblers work? The basic principle was developed more than ten years ago and has remained the same since. Essentially, the Bitcoin mixer receives transactions from various users and combines them into a common pool. The coins are mixed, shuffled, and split into a multitude of smaller transactions. Then they are sent out to target users. With this technology, cryptocurrency becomes untraceable: no one will be able to determine where each transaction came from, even by studying blockchain logs, because there will be lots of smaller transactions with interim addresses.
The Development of the Technology
However, as time passed, it was recognized that simply mixing coins is not enough, and users need additional security measures. In response to this demand, several new technologies for coin mixing were developed, such as CoinJoin, Chaumian CoinJoin, and CoinShuffle. Each of them has its benefits and brings additional levels of protection.
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CoinJoin
CoinJoin is the simplest method created by Gregory Maxwell. It works especially well when there are many users involved. Each of them sends their transactions to the common pool. Then the random path is created for each transaction. For example, if some User wants to purchase something by transferring the money to some Address, the coins that will eventually be received at the address will not be the same as the User has sent. The more users participate in the common pool, the more complicated the path of each transaction gets, thus making obfuscation more effective.
Charming CoinJoin is a variation of the same method, which was developed by Gregory Maxwell as well. It requires a centralized operator to work. Each user provides three addresses: input (where their money will be sent from), target, and the address for receiving change. However, the exchange between the operator and the users includes several stages of encoding data, so the operator does not have any information about the relations between source and receiving addresses. They do not have access to data about who wants to conduct a transaction to which address, because this data remains encrypted. For maximum efficiency, it is recommended to use crypto mixers through anonymous web, such as through TOR or I2P.
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CoinShuffle
CoinShuffle was created in 2014 as a response to another problem. Crypto mixers required an additional level of protection because of malicious users who intentionally attempted to use them to their advantage, such as stealing money or getting their hands on protected data. CoinJoin eliminates some of the threats by getting rid of a centralized operator. The system does not require one to make your transactions untraceable. Users interact with each other through a P2P network and encrypt their data by using a system of two keys (public and private). Communications are conducted via the DiceMix protocol, and their specialized algorithms to detect suspicious activities.
CoinShuffle provides other benefits as well. The risk of losing your money is minimized because the transactions will be performed only after each user checks the data and signs the transaction with their key. No logs about transactions are stored, because there is no centralized operator who would control the transaction.
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Confidential Transactions
There is one more technology used in modern crypto mixers, which is called Confidential Transaction. Its main feature is the ability to hide not only the source and target addresses of the transaction but also the number of coins being transferred. The method is based on “zero-knowledge proof” – a cryptocurrency anonymizing technology, which allows to validate of transactions without revealing their contents. The disadvantage of using this technology in coin mixers is higher demands for computational power. However, there are several cases of successfully using it to create an untraceable cryptocurrency.
Later a variation of this method was developed, called Ring Confidential Transaction. It was implemented in several untraceable cryptocurrencies, however, Bitcoin itself does not use this technology.
As you see, there are multiple methods to use Bitcoin anonymously. When you are looking for the best coin tumbler, we recommend reading about the technology it uses, because modern encryption methods, such as Shaumian CoinJoin or CoinShuffle, provide better protection than older ones. An effective coin tumbler probably will combine several methods for the most effective protection.
