The emergence of cryptocurrencies operating in decentralized networks has allowed Internet users to send money to each other directly, bypassing intermediaries. Now there is no need to disclose personal information when making payments. This feature is one of the main arguments of the supporters of cryptocurrencies to confirm the superiority of this technology over traditional electronic money. However, this advantage is associated with certain disadvantages. Just one violation of security measures on the part of the owner of the cryptocurrency (for example, when purchasing cryptocurrency on the exchange and making a simple bank transfer) is enough for his identity to be disclosed.
The role of cryptographic algorithms in crypto mixing
Since cryptocurrencies are based on blockchain technology, all transactions made in the system are recorded in a fully transparent and decentralized database. Any user of the system can find out when and to which address this or that transaction was made. Thus, the security of users from the point of view of anonymity is illusory. Fortunately, supporters of anonymity have created a special service called “Crypto mixing”.
What is “Crypto mixing”? “Crypto mixing” is a service in the form of an application or website that mixes a certain amount of your coins with coins of other holders, making it impossible to track their source. This is a kind of way to “smear the traces” during transactions, so that no one knows where the digital assets on your wallet came from, who they belong to and where they are going. Thus, cryptomixers increase the security and anonymity of cryptocurrency owners.
How does crypto mixing impact the traceability of cryptocurrency transactions?
Why use cryptomixers? The use of cryptomixers is associated with several reasons. Cryptocurrencies are a convenient means of payments that provide fast peer-to-peer transfers. Payments are not subject to the control of tax authorities, and transactions are not recorded in the bank’s accounting register. At the same time, information about all transactions is stored in a decentralized network that is not associated with a specific person. However, by analyzing this data, it is possible to trace the chain of money transfers and identify their senders and recipients.
Moreover, cryptocurrencies are also used to make payments in dark markets, including the darknet. However, the anonymity of money transfers is not always associated with illegal activities. There are legitimate reasons for hiding user transaction history:
- Transaction security: Some users do not want to disclose information about the availability of their assets.
- Protection of personal data: prevention of theft of assets by fraudsters.
There are two main types of cryptomixers: centralized and peer-to-peer. A centralized cryptomixer is a traditional service where coins are mixed with coins of other randomly selected users. If the service is used by a large number of people, it becomes difficult to link incoming and outgoing transactions from the same user. However, centralized services have several problems. First, you need to trust the service itself, since it has access to information about user transactions and can share this information with third parties if necessary. Secondly, there is a risk that such a service may end up in the hands of scammers who seize users’ coins without providing anything in return. Peer-to-peer mixers are anonymizers that solve both problems typical of centralized services. Peer-to-peer mixers are platforms where owners of digital assets come together to mix their coins. Participants have no information about other users, mixing stages, or bids. Transactions go through several stages of permutation before getting into the recipient’s wallet. The order and number of coins are randomly selected.