Cryptocurrency Mixers and Why Shutdowns Could Force A Pivot Toward On-chain Anonymization


Cryptocurrency mixers, or what is more commonly known as tumblers, recently made news headlines across crypto publications after Europol and several European authorities moved to shut down

The service was one of the largest in the crypto industry, but authorities pulled its servers after the platform allegedly became the favorite avenue through which criminal groups channeled dirty money.

Crypto stakeholders decried the action, saying it encapsulated gross overreach on the part of government agents. Many saw it as a move that could set a dangerous precedent- detrimental to cryptography even.

Ethereum co-founder Vitalik Buterin added his voice to the concerns, suggesting that the next move should be on developing on-chain mixing services.

It appears then that pivoting towards on-chain anonymization could provide a solution that those who want to remain anonymous with their cryptocurrency transactions might consider.

Are cryptocurrency transactions “anonymous”?

In cryptocurrency, it is common to come across terms like “anonymous transactions.” However, the reality is that most blockchains activities are pseudonymous and not anonymous. While crypto-related transactions do not require a third-party to proceed, many are times this has been mistaken to mean there is complete anonymity.

Transactions can take place without two parties revealing their identities, but the transaction is visible to other participants on the blockchain. That means that law enforcement or spies or such other bad actor can use blockchain forensics to trace and uncover the identity of either party to a transaction.

And that also explains why it is possible to tell public addresses that belong to cryptocurrency exchanges as well as other major crypto holders.

And authorities have used various techniques to link individuals to their alphanumeric crypto addresses, as was the case when the U.S. Treasury Department sanctioned two Iranian nationals who connived to swindle the public via the SamSam bitcoin ransomware attacks.

Are they anonymous? Not so, it appears.

Why cryptocurrency needs mixers

Privacy coins offer that anonymity feature through protocols like zero-knowledge proofs that help in total obfuscation of transactions, with Monero (XMR) and Zcash (ZEC) the most popular privacy coins.

Tumblers or cryptocurrency mixers also help ensure anonymity by obscuring both transaction origin and destination- so that no one can use either public address to track transactions back to a real-life identity.

“Mixing” works by having the targeted transaction put in a ‘basket’ containing other transactions with the same value, making it difficult to pick one from the other. Users create something called a “burner address” or simply a temporary wallet to receive “mixed coins.”

The need for anonymity has seen bitcoin users go for mixing services, with data showing that usage has jumped 300% from August 2018. By April this year, mixed bitcoin transactions (called “CoinJoins”) made up roughly 4.09% of BTC payments.

Just as with tumbler services, governments and other authorities are not okay with the issue of privacy coins. And that has seen countries like France and Japan call for a ban on these privacy coins. China prohibits blockchain companies from developing anonymity-enhancing features.

And to justify the need for any crackdown, authorities say privacy coins enable criminal activities like money laundering, tax evasion or financing of terrorist groups.

That is the same anchor Europol’s report relied on to shutdown of that the site promoted money laundering among other illegal transactions.

While these allegations can be true in some cases, but the blanket conflation of privacy and anonymity with criminality has seen many within the crypto community express concern.

In the aftermath of the shutdown, authorities in Europe revealed that they would share details carted away from the platform with governments around the world. John McAfee was among those to respond, stating via Twitter:

“Bitcoin mixers are now being targeted. Anonymity itself is slowly being considered a crime. The word ‘Privacy’ will soon mean ‘Criminal Intent.'”

Some observers, like bitcoin developer Sjors Provoost, said that the move set a bad precedent and that bitcoin mixers were the only way to mitigate BTC’s “poor on-chain” privacy. He said revealing details “put lives at risk.”

And with assaults, robberies and even murders committed against a growing number of crypto holders, making such information available simply puts someone’s life in danger.

On-chain anonymization then

It appears governments still hold onto the anti-crypto sentiment and are unlikely to stop the clampdown on anonymity-enabling tools like Bitcoin mixers. But what this says then is that crypto developers could soon pivot towards creating robust platforms that authorities will find hard to expurgate or monitor.

Another way would be to come up with better mixers that governments cannot shut down easily, with Buterin’s suggestion of an on-chain Ethereum (ETH) mixer potentially providing the next pivot in cryptocurrency.

The Ethereum co-founder suggested that the ETH mixer would have to do more than just spread up transactions among numerous users. He noted that it would need to provide complete obfuscation of every transaction detail, making sure none was accessible on the blockchain.

Plausible, buy Buterin went on to say that such an on-chain system would likely only handle limited amounts of ether (ETH).

Cornell University associate professor Emin Gün Sirer, however, mentioned that such systems would likely not work with Bitcoin and Ethereum.

According to him, on-chain mixers are not a viable solution for the two blockchains because BTC is limited in terms of capacity and is “change-averse.” Ethereum, on the other hand, would like to build “a world computer.”

However, there is a likelihood that other cryptocurrencies will emerge, with “bolt-on alternatives,” that he says authorities “will not be able to control or corral.” Prof. Sirer noted this in correspondence with crypto publication Cointelegraph.

Disclaimer: This is not investment advice. Cryptocurrencies are highly volatile assets and are very risky investments. Do your research and consult an investment professional before investing. Never invest more than you can afford to lose. Never borrow money to invest in cryptocurrencies.

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