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Bitcoin mixers are solutions (software or services) that allow users to mix their coins with other users in order to preserve their privacy.
Although Bitcoin addresses are “pseudonymous” – they do not, by themselves, reveal the identity of their owner – they can still be linked to real-world identities.
For example, if you withdraw bitcoin from an exchange where you identify yourself, the exchange knows that the withdrawal address is yours. There are also more advanced techniques – such as blockchain analysis – for linking Bitcoin addresses to real-world identities.
The next time coins are moved from these addresses, users risk revealing all sorts of personal information. Depending on how they spend their coins, they can reveal how many coins they have (even at other addresses), what they spend their money on, and more.
By mixing their coins, users can blur the ties between their Bitcoin addresses and real-world identities. This allows them to use Bitcoin more privately.
How do bitcoin mixers work?
Various mixing strategies have been proposed and developed over the years. These range from fully centralized solutions where all users trust one mixer, to solutions where users don’t have to trust anyone, to solutions that resemble Lightning Network style payment channels, and even using privacy coins like Monero as an intermediate step in the mix.
Rather than exploring all (potential) options, let’s limit ourselves to two of the most popular solutions available today.
Centralized Mixers
Centralized mixers are services that accept bitcoin payments and send different currencies in return. If many people use a particular mixing service, it becomes increasingly difficult for an outsider to link any of the “incoming” currencies to any of the “outgoing” currencies. This breaks the transaction trail, offering users privacy.
However, centralized mixers leave two major problems unresolved. One, users need to trust their privacy with the mixer. Since the mixer knows exactly which user sent and received which coins, it can re-establish the ownership trail.
If the mixer is willing to share this data with interested parties (perhaps because it is required by law or in exchange for payment), the user will lose their privacy after all.
And two – perhaps even worse – the mixer could refuse to pay back, essentially stealing the user’s coins.
Mixers Chaumian CoinJoin
Most modern mixers have solved both of these problems. The Chaumian CoinJoin mixers, for example, allow a large group of users to cooperate by making a large payment to themselves.
Basically, if one hundred users send exactly 0.1 BTC to a new address they control, and then merge those 100 transactions into one big transaction, everyone gets 0.1 BTC back, but nobody can see where they got it from.
Furthermore, Chaumian CoinJoin mixers can be designed in such a way that not even the entity that “merged” the transaction can figure out which coins went where. Nor could it steal coins: users wouldn’t sign the merged transaction if they didn’t get their 0.1 BTC back.
Why would you mix your coins?
You would mix your coins to protect your privacy, and there are many reasons to protect it. In short, you might not necessarily want the world to know where you spend your money, what you earn, or how much bitcoin you own.
In fact, there are literally countless reasons why people might want privacy. In fact, even if you don’t care about your privacy, you might want to altruistically mix coins to increase the anonymity of the people you care about.
Can bitcoin mixers be banned?
Whether or not bitcoin mixers can be banned is really a legal question, not a technical one. Therefore, it will differ from jurisdiction to jurisdiction. There are examples of mixers that were banned as authorities claimed the service was being used for money laundering.
The most popular mixing services these days are centralized (trusted or not), meaning they can be shut down relatively easily by the authorities. Until now, however, many mixing services continue to operate without restrictions.
If centralized mixing services face bans and outages, decentralized mixing services can take their place. These would be harder to take down.
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