Many think that bitcoin is anonymous, but actually, bitcoin is more pseudonymous. The difference is that anonymous means that someone’s identity is completely unknown, while pseudonym means that someone uses another name but the person’s identity can still be known.
For example, in the case of a bitcoin wallet, transactions usually don’t include your name, but a bitcoin wallet is a series of numbers and letters associated with your account. So indirectly this is pseudonymous because your identity is replaced with another name such as “7Hkiji79767nnsoijs79rk55kn4mm”. We cannot know directly that this wallet is your wallet, but by looking at the pattern that repeats itself, this bitcoin wallet may be associated with your identity based on data obtained from the blockchain.
Because the blockchain is transparent, bitcoin does not directly provide privacy but users have the option to be publicly transparent as they wish.
For those who don’t want their transactions to be publicly known then they can use CoinJoin or Coin Mixer.
- 💡 Bitcoin mixer is a tool used to increase the privacy of Bitcoin transactions.
- 💵 Bitcoin Mixer is often confused with money laundering activities but is actually based on research by blockchain analytics company Chainalysis, for example, a mixer is mostly used by casual Bitcoin users who just want privacy. Few coins are used for illicit purposes using Coin Mixer.
What is Bitcoin Mixer?
Coin Mixer is a Bitcoin transaction where multiple users combine their UTXO (Unspent Transaction Outputs) into one large transaction with multiple inputs and multiple outputs. Bitcoin transactions usually consist of one sender and one receiver. So that we can find out which input corresponds to which output and vice versa. The purpose of Bitcoin mixer transactions composed by multiple inputs and outputs is to break patterns within the blockchain.
Why use Bitcoin Mixer?
There are various reasons why people want to use Bitcoin mixer, the main reason is privacy and they don’t want the world to know why they want to use their crypto assets.
For example, Alice is a whale and she has 10,000 BTC in her wallet. Without Coin Mixer, one can use Alice’s wallet address to find out what Alice’s balance is. If someone finds out that Alice has a large amount of Bitcoin, she could be the victim of a hacker attack, theft, or even kidnapping. To ensure that Alice has a higher level of privacy, Alice can use the Coin Mixer so that when the transaction takes place her identity is not known to the public. Thus the bitcoin transaction cannot be traced or associated with Alice’s identity.
💡 In transactions with fiat currency, we do not know the history or anyone who has owned/used our paper money. It’s different with Bitcoin. With UTXO, the history of coin ownership is publicly available.
Supported by increasingly complex blockchain analysis technology, it has become easier to find out and connect the wallet and the real identity of its owner. Coin mixer serves to disguise this and provide full privacy for bitcoin users.
How Does Coin Mixer Work?
Coin Mixer basically works by taking your bitcoins, mixing them with other bitcoins, then sending you smaller units of bitcoins to the address you choose plus the total amount you enter. Coin Mixer service providers usually take 1-3% profit from the total transaction as a coin mixing fee.
For example, Alice, Bob, Charlie, and Daisy did a transaction worth 2, 4, 6, and 8 BTC for a total of 20 BTC. While Coin Mixer has transaction services worth 3%. Coin Mixer will generate 20 separate new outputs worth 0.97 BTC each (Minus 3% of fees for Coin Mixer services). The output will be distributed to each user in an amount equal to their initial contribution.
💡 By using Coin Mixer, Alice, Bob, Charlie and Daisy’s transactions will be mixed and will be split so that the transactions will show sent from the mixer address. So it is not known who sent and who received.
What Can Coin Mixer Do?
- 🧮 Amount Decoration: Alice makes two regular Bitcoin Payments to two anonymous Bitcoin Addresses, both of which cannot be correlated to the 0.5 BTC Bob ends up receiving.
- ⌚ Time Decoration: Alice chooses exactly when each of her stashes is sent. Alice also chooses exactly when Bob is finally paid.
- 👛 Cluster Relations: Wallet (or Cluster) Alice sends her Bitcoins, not at all connected to the Wallet paying Bob.
All Transactions look like regular payments between users on Blockchain. Nobody knows that Bitcoin Mixer has been used.
Dangers of Coin Mixer
Coin Mixer operates as a custodial service in the sense that when you send bitcoins to a company that serves Coin Mixer, you fully trust your bitcoins in Coin Mixer’s hands. This can be dangerous if you don’t know which companies are good or bad. Maybe the Coin Mixer company can take your Bitcoins away.
What is CoinJoin?
CoinJoin is a model of Coin Mixer but unlike Coin Mixer as a service, Coin Join is a piece of software. And Coin Join users have full custody of their coins.
For example, Alice, Bob, Charlie, and Daisy do a transaction with 2, 4, 6 and 8 BTC for a total of 20 BTC, the CoinJoin transaction will produce 20 separate outputs worth 1 BTC each. The output will be distributed to each user in an amount equal to their initial contribution. Since each output has the same value, in theory, it would be very difficult to tell which new bitcoin address is now controlled by each of the four original users.
The difference between CoinJoin with Mixer is that CoinJoin is software, whereas Coin Mixer is usually a company providing services. Technically, Coin Join is legal, but Coin Mixer is not.
Based on FinCEN regulations, CoinJoin can be categorized as a sending, communication, or network access service used by money senders to support money transfer services.