Cryptocurrency mixers.

The popularity of cryptocurrency (like bitcoin) is partly due to the transparency of the blockchain. Anyone can see the transactions on the (bitcoin) blockchain. You do not see a name and address to whom the bitcoin was sent.  This is due to the hashing function. This is a series of letters and numbers which do not say much about the origin and destination of the sent crypto. But there are users who are not happy with this transparency and are still afraid that, for example, governments will be able to crack the hashing function.

Why would you use a mixer?

Cryptomixers are often used by criminals. Criminals use mixers for example to launder money or to make the traceability of the sent crypto even more difficult. But a surprising study by the renowned blockchain analysis company Chain Analysis shows that only 10% of the bitcoins sent to mixers originate from illegal activities (the fourth quarter of 2020). 

The controversy about mixers is often unjustified. The vast majority of users do not use mixers for illegal activities, but to protect their privacy. Everyone should be able to guarantee their privacy in the blockchain sphere.

What is the ultimate goal of cryptomixers?

Suppose you want to buy crypto. To do that, you need to go to an exchange. Before you can buy crypto, you have to provide your personal details to the exchange (KYC). This exchange will also give you a wallet to store your crypto. The exchange knows who you are and they can always retrieve your information. Each account on an exchange has a unique API key that refers to a certain user. This key consists only of numbers and never personal information.

A bitcoin mixer can be used without having to disclose your personal information There is also no registration and a KYC procedure. A bitcoin mixer is therefore secure in terms of the traceability of the crypto.

A bitcoin mixer ensures that the link between the original transaction and the associated address (hash) is broken (link between source and destination addresses). On the blockchain you can follow the transaction by following the hash. So by breaking the link you can no longer follow the transaction. You can also split the transaction into smaller transactions. By breaking the link between the transaction and the associated address, the transaction is much more difficult to trace. Privacy is key here.

Types of cryptomixers

Centralized mixers

Centralized mixers are services that accept bitcoin payments and mix different crypto currencies in exchange. If many users use this mixing service, it becomes increasingly difficult for third parties to match a particular incoming transaction with an outgoing transaction. As a result, the transaction becomes untraceable. The crypto is mixed with other crypto transactions in such a way that it is no longer possible to identify to which (outgoing) crypto it is linked. The outgoing crypto (after it has been mixed) cannot be linked to the incoming crypto (before it was mixed). This offers a lot of privacy to users.

But there are two major drawbacks of centralized mixers. The users who want their crypto mixed must rely on the centralized mixer. The person or persons performing the mixing activities must be trustworthy. These persons can share this information with third parties, such as governments or security services. As a result, the user loses his privacy.

The second disadvantage is that if the persons performing the mixing activities know how much and which crypto is being mixed, the centralized mixer can steal this incoming crypto.

Decentralized mixers

A large group of users collaborate on one large transaction through the mixing activity. So there is no middleman like the central mixer. Suppose 100 users all send 1 bitcoin to a new wallet address (100 transactions). These 100 transactions will be merged into one wallet. Then everyone takes back a portion of this deposit. Nobody knows exactly where this specific part came from. There is also no central mixer that have this information. As a result, you no longer know where your crypto is linked to because your share is mixed up with other transactions and you just received a portion of the total Bitcoin in a wallet. Ingoing crypto and outgoing crypto is therefore not traceable anymore.

Cons of mixing

The purpose of a mixer is privacy. Because you are mixing 100 transactions and you just get a portion of these mixed transactions, you may end up with contaminated crypto that has been used for illegal activities, for example.  

Currently, many mixing services are centralized. This means that authorities can easily shut down these services. After all, the authorities have insight into the activities that take place. With decentralized services it is a lot more difficult. This is because there is no central authority that has an overview of the mixing activities.

Many hackers use such decentralized mixers to ensure that the crypto cannot be traced. Well known examples of hacks that used a mixer are the SQUID game coin hack and the Bitmart Heist. A decentralized mixer is a great way to move your crypto out of the scope of the authorities if you value your privacy. 

Reporters and their sources

A journalist never gives away his or her sources.  It happens regularly that if a journalist writes about politically sensitive subjects (e.g. corruption or sexual abuse) he or she may be endangered. Because the journalist is paid through a mixer, nobody can find out where that money comes from. The source that passes on sensitive information to the journalist can therefore remain anonymous. After all, the journalist's remuneration (destination address) cannot be linked to the incoming transaction (source address). 

Remember that it can also work the other way round. Bribery of politicians or journalists, for example, is also easier with a (centralized of decentralized) mixer. But also undesired influence (on education, for example) through donations from certain criminal organizations (or specific countries) can remain under the radar.

Additional comment after the publication: The success of a cryptocurrency mixer depends on how much crypto owners want to put into a mixer. If a decentralized mixer has no or few users who provide crypto in that decentralized mixer, then cryptocurrency mixing will therefore be difficult. Liquidity in a decentralized mixer is therefore essential for mixing cryptocurrencies.