Since the beginnings of Bitcoin and its native token and other cryptocurrencies that have revolutionized the current financial system, the transparency inherent in the most widely used blockchains, with the exception of Monero, has raised privacy concerns, despite the fact that addresses are not directly linked to personal identities.
To deal with these concerns, a variety of tools have emerged that focus on reinforcing the anonymity of transactions, most prominently cryptocurrency mixers.
In today’s article, we will dive into the origin and purpose of these tools, examine their security and privacy implications, and describe how they process and redistribute funds. Also, we will analyze the risks associated with their use, discuss the growing trend of software criminalization, and assess whether mixers will remain an essential tool for privacy in the crypto ecosystem or if, on the contrary, their use will end up being restricted by increasingly strict regulations.
Background and origins
When Satoshi Nakamoto mined the genesis block of Bitcoin on January 3, of 2009, his goal was to create a decentralized system that would offer an alternative to the traditional banking system. However, over time it became clear that, although Bitcoin addresses were not directly linked to real identities, the analysis of transactions on the blockchain made it possible to trace funds and reconstruct the history of users.
In addition, the emergence of specialized transaction-tracking tools made it possible to associate addresses with verified accounts (KYC), making it easier for governments and security agencies to use this data to combat financial crime. Therefore, although in the popular imagination some people considered Bitcoin to be completely anonymous, the reality is that it is a pseudo-anonymous system, since the Bitcoin blockchain is public and accessible to all users of the network, and allows all transactions, addresses and the total supply of bitcoins to be shown.
With this in mind, we can understand why privacy concerns began to arise within the crypto ecosystem, and to counteract the lack of privacy in Bitcoin transactions, between 2013 and 2014 the first cryptocurrency mixers emerged. These allowed users to send bitcoins to a pool and receive the same amount of bitcoins from new, unrelated addresses, thus increasing anonymity.
An example of this was Bitcoin Fog (2013), one of the first centralized mixers, widely used on the deep web to hide transactions, and BitMixer (2014), which was very popular until its closure in 2017 due to regulatory concerns. These early mixers were criticized because they required trust in the operator, making them vulnerable to theft or the possibility of them logging user data.
Another example would be the case of NXT, recognized as the first blockchain to implement a pure PoS system, although it was not a traditional mixer, it incorporated native features to improve the privacy of transactions. Among them, it highlighted the implementation of CoinShuffling, a protocol similar to CoinJoin in Bitcoin, but integrated directly into its blockchain, allowing users to combine transactions and make them more difficult to trace.
This method allowed multiple users to combine their transactions into a group, redistributing funds randomly to break the relationship between sender and receiver. It also allowed encrypted messages to be attached to transactions, making it easier to send information without it being publicly accessible on the blockchain.
What are cryptocurrency mixers and how do they work?
As mentioned above, cryptocurrency mixers (sometimes also known as tumblers) are services that allow users to hide the origin and destination of their digital assets, combining multiple transactions from different users and redistributing the funds to new addresses. Depending on the service used, mixers typically charge fees ranging from 0.5% to 7% of the transaction value, and the two main types of mixers that exist are:
- Centralized mixers: Operated by third parties, these services receive cryptocurrencies from users, mix them in a common pool and then return the same amount, except for the applied fee, to a new address. The main drawback of this type of mixers is that the user must trust the operator of the service, who could record transaction data or be the victim of hacks, compromising the privacy of the funds.
- Decentralized mixers: Based on smart contracts or peer-to-peer (P2P) anonymization protocols, these systems eliminate the need to trust a centralized operator. Examples include CoinJoin and Wasabi Wallet in Bitcoin, and Tornado Cash in Ethereum.
Operating process of a mixer
The way a cryptocurrency mixer works is based on the disassociation of the inflows and outflows of digital assets by sharding, forwarding and redistributing funds in multiple directions, with the aim of breaking traceability on the blockchain. This process is generally divided into four stages although there may be variations depending on the established protocol:
- Entry of funds into the mixing pool:
When the system receives a transaction, it is allocated to a temporary storage buffer, where it awaits processing. Afterwards, the validity of the transaction is verified by validation on nodes of the blockchain network, ensuring that the funds are legitimate and that the transaction meets the rules of the protocol.
Mixing and dissociation algorithm:
Once confirmed, the funds enter a mixing pool, where they are combined with other incoming transactions to disassociate their origin and destination. Depending on the protocol used, these pools may be designed not to process transactions immediately, but to wait until a maximum token capacity is reached before executing the blending. Since this limit is not always public, the waiting time may vary: in some cases, it could be a few days, while in others it could extend up to a week or more.
This mechanism prevents transactions from being mixed with a small number of users, which would make it easier to trace funds. The greater the number of transactions within the pool, the more difficult it will be to establish connections between deposits and withdrawals, ensuring a higher level of anonymity.
Other protocols, such as Tornado Cash, add more complexity by allowing each pool to only accept deposits of certain tokens and in specific amounts, for example, only allowing deposits of 1 ETH, while others may accept other amounts. This process, known as mixing, is what breaks the traceability of transactions on the blockchain. - Mixing and dissociation algorithm:
In this process, the mixer employs advanced cryptographic techniques according to the protocol it has established, such as zk-SNARKs in Ethereum, which is a protocol based on zero-knowledge proofs that allows validating transactions without revealing details of the parties involved; or CoinJoin in Bitcoin, a technique that groups multiple transactions into one, making it difficult to identify the original sender by combining all inputs and outputs.
Another very common technique is variability in amounts, where funds are fragmented into non-identical amounts before being sent to destination addresses, preventing the total sum from exactly matching the initial deposit. The objective of this process is to break the correlation between input and output addresses, apply pseudo-random algorithms to define the times and amounts of each transaction and ensure that there is no traceable pattern in the blockchain, making forensic analysis of transactions more difficult and improving user privacy. - Redistribution of funds to destination addresses:
Once the mixing process is completed, the system proceeds with the redistribution of funds by sending them to new addresses controlled by the user, ensuring that there is no direct correlation between the incoming and outgoing addresses.
To maximize privacy, mixers implement several advanced techniques, such as the generation of multiple outgoing addresses, where the mixer requests several receiving addresses from the user and distributes the funds into different wallets, preventing the mixing pattern from being reconstructed.
Variable redistribution time is also applied, introducing random delays in outbound movements to make it more difficult to predict when and how funds will be sent. This set of strategies has a significant technical impact on the blockchain, as it breaks up the transactional trail, making it difficult for forensic analysis tools to link the original and destination addresses. - Transaction confirmation:
Once the redistribution of funds is completed, the user receives the cryptocurrencies at the output addresses previously specified. To ensure transparency and traceability within the system, a transaction confirmation hash is generated on the blockchain, allowing verification that the funds have been processed correctly.
Some advanced mixers also offer cryptographic guarantees, such as the issuance of hash proofs of mixing, which make it possible to prove that the process has been carried out without manipulation and that the funds were redistributed without alterations.
Risks associated with the use of crypto mixers
The use of cryptocurrency mixers offers a significant improvement in the privacy of blockchain transactions, allowing users to hide the origin and destination of their funds. However, it also carries a number of risks that should be considered before using them.
In addition, although mixers are designed to anonymize transactions, government agencies such as the FBI have developed blockchain forensic analysis tools that are able to identify mixing patterns and trace funds even after they have passed through these services. Therefore, to prevent fund movements from being able to be analyzed and traced, it is advisable to employ strategies in addition to the use of mixers. One of them could be the use of wallets that allow multiple addresses to be generated.
Another important risk is the use of centralized mixers, where users must rely on an operator who may record information about their transactions or, in the worst case, be tapped by authorities, which could expose their clients’ data or even result in the confiscation of funds. For these reasons, while mixers represent an attractive option for enhancing privacy, they can also present legal and security implications that users should carefully evaluate before using them.
Criminalization of software
Many governments consider certain technological services as money laundering and illicit financing tools and, as a consequence, in several jurisdictions not only have these services been banned or sanctioned, but also the people who have developed them.
Although software development is a neutral activity, like any other technological tool, it can be used for both legitimate and illegal purposes, depending on the user. However, in recent years, some courts have adopted a worrying logic: if a program can be used for illegal activities, its creator can be considered an accomplice to those crimes, regardless of his intention.
The case of Alexey Pertsev, developer of Tornado Cash, has reopened the debate about the criminal responsibility of programmers and the dangerous precedent being set in the software industry. While his conviction is related to financial privacy and the use of cryptocurrencies, it is not the only case where a developer has been punished for others’ use of his software.
This already happened with Ross Ulbricht, creator of Silk Road, who was sentenced to two life sentences plus 40 years in prison for having developed and operated a platform on the deep web. Although Ulbricht did not sell drugs or directly participate in illegal activities, the courts held him responsible for the illicit activity that occurred within his platform.
Now, Pertsev’s conviction of more than 5 years in prison reinforces this worrying trend and, as one would say colloquially, the courts are shooting flies with cannons by going after the software creators instead of the real criminals. Moreover, it should be noted that the principle of criminal liability has always been based on intent and active participation in a crime. However, the courts have chosen to change this logic when it comes to software, applying a double standard that criminalizes developers for the acts of third parties.
In this way, the authorities are singling out the creators of technological tools, under the argument that they “must have foreseen that their software would be used for illicit purposes”, but… Should a telecommunications company be penalized because its networks are used by criminals to coordinate crimes? Or should car manufacturers take responsibility if their cars are used in robberies?
Conclusion
Despite the fact that bitcoin and other decentralized cryptocurrencies have revolutionized the financial system, the inherent transparency of their networks has generated the need for tools that allow users to protect their identity and transactions.
For this reason, the use of mixers is key in contexts where financial privacy is very important, such as in countries with oppressive regimes, to make anonymous donations or to protect journalists and activists working on sensitive issues or in high-violence environments. However, their association with illicit activities has generated strong regulatory pressure, leading to the closure of several services and the development of forensic analysis tools that challenge their effectiveness.
In the end, we face the same old dilemma: software, in essence, is just a tool, with no intrinsic morality, neither good nor bad. Its use depends only on the intention of the user. Just as money can be used for both legitimate and illicit purposes, it is not considered illegal. The key is not in the tool itself, but in how and for what purpose it is used.
Resources:
[1] CoinShuffle – Practical Decentralized Coin Mixing for Bitcoin
[2] Investopedia – CoinJoin: What It Is, How It Works, and Privacy Considerations
[3] Coinbase – ¿Qué es un Mezclador de Bitcoin?
[4] Chainanalysis – Crypto Mixers and AML Compliance
[5] ATH21 – Tornado Cash, blanqueo de capitales y desarrollo de software libre
At Block&Capital, specialists in tech recruitment, we strive to create an environment where growth and success are within everyone’s reach. If you’re ready to take your career to the next level, we encourage you to join us.
Last posts
