What is a Cryptocurrency Mixer: In Search of Privacy

One of the most widespread myths about Bitcoin (and most public blockchain networks, with a few exceptions such as Monero) is that its transactions are anonymous.

However, the information stored on the Bitcoin network is actually pseudo-anonymous.

This means that the transactions carried out are visible to everyone, so the information is public. However, it is true that the senders and recipients of these transactions are nothing more than a string of numbers and letters that are NOT intrinsically linked to any real-world identity.

In other words, the information contained in a public blockchain network is visible to everyone, but no one knows, at first glance, who is behind each transaction. Everyone can see that X sent 1 bitcoin to Y, but no one knows who X is or who Y is. That is why they are pseudonymous.

However, reality shows that it is possible to link a large number of public IP addresses to the individuals or entities that own them. This is because, when we interact with the internet, we leave a trail that can be used to link our personal identity to all the activity we carry out online.

How is that possible?

Well, basically because, when moving funds on or off the blockchain—that is, when depositing or withdrawing fiat currency from the real world to exchange it for cryptocurrency—we use mechanisms that require personal identification (for example, when interacting with platforms that use Know Your Customer systems, or when we publicly share our public address—pardon the pun—to receive donations, payments, etc.).

Furthermore, by using advanced techniques, it is possible to link different wallets and payments to specific identities based on data stored in big data; however, it should be noted that in these cases, this is typically a probabilistic estimate, and it is not possible to prove this relationship with 100% certainty.

On the other hand, this means that anyone can see who you interact with and how, how much cryptocurrency you own, and link that information to your personal identity. This is where cryptocurrency mixers come in.

What is a cryptocurrency mixer?

A cryptocurrency mixer is an application or service that allows users to erase or hide the trail of cryptocurrency transactions, making them anonymous again by sending them to addresses that have not been compromised (linked to real-world identities).

Types of cryptocurrency mixers

At first, cryptocurrency mixers were designed to operate centrally: a company provided a service for which it charged a fee in exchange for receiving your cryptocurrency, combining it with others and mixing it (hence the name), and sending it to its recipient. This way, there was no public record on the blockchain of who you were sending the cryptocurrencies to from the tainted address. The address was thus left clean with an amount of cryptocurrency that no one could link to any real identity.

However, this type of mixer has a fundamental problem: the intermediary company knows and logs your incoming and outgoing data, so it could sell your information or disclose it if compelled to do so.

This is why decentralized mixers were developed. These are programs hosted on the blockchain (smart contracts) that allow numerous users to send their cryptocurrencies to the protocol.

It is designed (in broad terms, since each protocol has its own specific and complex functions) to collect all the funds received, divide them into portions, mix them together, and send small amounts to the group of recipients specified by the senders (each receiving their corresponding amount, of course).

In this way, and with remarkable efficiency, any cryptocurrency sent via these protocols becomes completely untraceable, making it impossible to link the final recipients to any real-world identity.

Privacy Under Siege

These mechanisms would be the silver bullet for privacy if it weren't for the fact that governments are cracking down on them.

Over the past two years, we have seen that several of these decentralized projects have been targeted, including the arrest of their creators, as in the case involving the Tornado Cash, a decentralized protocol that is therefore not controlled by any specific entity. This has sparked a major debate within the community.

In addition, many platforms on which a large part of the crypto community relies have blocked or prevented the use of cryptocurrencies that have passed through any of these cryptocurrency mixers. As a result, addresses holding mixed cryptocurrencies will not be able to use them.

Governments justify cracking down on these types of protocols because, as some leading blockchain analysis firms have demonstrated, these mixers are sometimes used to launder cryptocurrency stolen in hacks or banned for other reasons.

This is not an opinion piece, so I will simply say that I don’t get the impression that the money laundering argument is the real reason governments are targeting privacy. But it is the official line.

Ultimately, cryptocurrency mixers are currently at the center of a debate that goes far beyond the use of these applications: it concerns the right to privacy of every citizen versus the duty to ensure public safety. It’s the age-old debate: freedom versus security.

And that's a topic that could easily be the subject of another article.

By Jorge Infante Fernandez.

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