A "Bitcoin mixer" is a protocol that increases the privacy of transactions. Various crypto mixers are available (namely, custodial and non-custodial) that can muddle the public blockchain history. As such, crypto mixers are ideal for providing an increased layer of security when moving funds. However, permissionless access to some of these protocols leaves them vulnerable to laundering illicit cryptographic assets.
In this article, we are going to dive deep into the world of crypto mixing. First, we'll look at the definition of crypto mixing and Bitcoin tumbling and how these services operate. Also, we'll explore the different types of crypto mixers available and the various operating models they include. In addition, we'll discuss the legalities surrounding interactions with a Bitcoin mixer and look at legitimate use cases for crypto mixing services. Finally, we'll evaluate the possibilities of tracing transactions and the security aspects of using crypto mixers.
If you would like to learn more about how blockchain technology works, see our Blockchain & Bitcoin Fundamentals course! Regardless of age or experience, Moralis Academy offers courses to welcome everyone into the world of Web3! In this course, you’ll learn about the history of blockchain, Bitcoin mining, nodes, UTXOs, forks, and so much more! For the best place to learn all things blockchain, check out Moralis Academy today!
What are Crypto Mixers?
The Bitcoin blockchain is a cryptographic protocol offering pseudonymity in the nature of its design. However, all transactions, including wallet addresses and the amount of funds moved, are publicly transparent and traceable on a public block explorer. As such, to use a cryptocurrency on a public blockchain anonymously, users will need to interact with a Bitcoin mixer or other relevant crypto mixers.
Crypto mixers allow users to keep their transactions private by sending funds to a mixing service. There are different types of Bitcoin and crypto mixer services available, often that don’t hold KYC (know your customer) requirements. On a public block explorer, it shows that person "A" sent funds to a Bitcoin mixer (as did hundreds of other addresses), and person "B" received funds from a Bitcoin mixer (alongside hundreds of other people). However, there is no way to prove who sent which crypto asset to whom.
Accordingly, crypto mixers can fully anonymize cryptocurrency transactions which, by proxy, provide the potential to launder dirty Bitcoin or other cryptocurrency assets. Moreover, the term "Bitcoin mixer" is commonly interchanged with "Bitcoin tumbler". However, there is a key distinct difference. Bitcoin mixers provide a decentralized mixing service, whereas Bitcoin tumblers are commonly centralized as a third-party provider.
How Do Crypto Mixers Work?
Now we understand what crypto mixers are, let's take a look at how they work. There are different types of Bitcoin and crypto mixers that operate slightly differently. However, the overall principle works the same. Users send an amount of an asset to a mixer. Then, the user will define a time period before withdrawing the amount from the mixing service. Regardless of the operating model, coin mixing services usually charge a small fee to cover profit margins and/or the cost of protocol operations. This means users will typically receive 1-3% less funds than the amount they put in.
When withdrawing funds, users can send funds to a new wallet address. Some services include extra cryptographic security features (i.e., ring signatures and zk-SNARKs) in the withdrawal transaction to anonymize certain transactional data.
Exploring Different Types of Bitcoin Mixers
There are two main categories of crypto mixers: custodial and non-custodial mixers. Alternatively, you could classify these as centralized and decentralized services. There are pros and cons to both options while catering to different markets. In short, users can decide between opting to send funds to a third-party provider or interact with smart contract protocols on the blockchain.
For readers who would like industry-expert tuition on navigating the world of DeFi, see our Master DeFi in 2022 course at Moralis Academy! Perfect for beginners, Moralis shows students how to install and interact with the leading Web3 wallet, MetaMask. Plus, we teach students how to use MetaMask with a variety of popular Ethereum DeFi protocols. Start your crypto journey the right way at Moralis Academy today!
Centralized Bitcoin Mixers
Companies operating as a small team of people who offer a Bitcoin mixer service are centralized. Such services can be referred to as "Bitcoin tumbling". In addition, centralized mixers provide a custodial service using obfuscation-based mixers or decoy-based mixers to conceal users' transactions. This means that users will send their Bitcoin (BTC) to the Bitcoin mixer and receive different Bitcoin (BTC) for a small fee. Overall, centralized mixers are a simple solution for tumbling or mixing Bitcoin or other crypto assets. A trusted third party takes care of all operational complexities and responsibilities, offering a smooth and easy customer experience. An example of a popular centralized Bitcoin mixer service is BlindMixer.
However, centralized crypto mixers come with some cons too. First, fees for centralized services are notoriously higher than for decentralized services. Also, there is no guarantee that the third-party mixing service will return funds afterward, leaving user funds vulnerable to theft. In addition, while the public record of mixing coins will be private and anonymous, the mixer service itself will often keep a record that connects the transactions. This means the service could reveal the transactional connections at some further point.
Decentralized Bitcoin Mixers
The alternative to centralized mixing providers is a decentralized crypto or Bitcoin mixer. Instead of operating from a centralized party, decentralized or peer-to-peer (P2P) services operate on the blockchain running across a network of hundreds or thousands of computers (nodes). Furthermore, P2P crypto mixers offer a non-custodial service by design. This means users interacting with a mixing protocol will have access to their funds at all times.
Decentralized Bitcoin mixer protocols are borderless and permissionless with no KYC requirements. The protocol pools together many transactions from different users and then redistributes the funds to users accordingly. Often, decentralized crypto mixers use either zero-knowledge or obfuscation-based approaches. However, zero-knowledge proofs are cryptographically intensive, which presents challenges around scaling.
Just like centralized mixing providers, decentralized crypto mixer protocols can assist in hiding and anonymizing the history of cryptocurrency transactions. However, decentralized protocols allow users to have access to their funds at all times, which, in turn, requires more responsibility on the users' part. Some of the most popular decentralized mixing services include CoinJoin, Wasabi Wallet, and JoinMarket. Nevertheless, make sure to do your own research before interacting with any crypto or Bitcoin mixer protocol.
Legalities of Crypto Mixers
"Dirty", "illegal", or "illicit" money refers to a sum of funds acquired through unlawful activities. As crypto mixers can muddle the public trace of transactions on the blockchain, the opportunity for laundering crypto is considerably large. However, it's not just crypto mixers. According to Cointelegraph, crypto mixers process around a quarter of available illicit Bitcoin each year. On the other hand, gambling sites and exchanges account for approximately 66% to 72%. As a result, coin mixing is reputedly comparable to money laundering, but interacting with mixing protocols isn't necessarily a crime.
Users interact with crypto mixers to predominantly increase the privacy of their transactions. Arguments as to whether or not crypto mixing or Bitcoin tumbling is legitimate are often determined by the users' intentions. The legality of interacting with crypto mixers varies depending on which jurisdiction one resides in.
According to the former United States Assistant Attorney General, Brian Benczkowski, interacting with crypto mixer protocols with the intention of disguising transactions is criminal conduct. The argument for this is Bitcoin's intention for privacy, not anonymity, with public block explorers auditable for investigations into any malpractice or misconduct. The Financial Crimes Enforcement Network (FinCEN) classifies Bitcoin mixer services as "money transmitters". Therefore, mixing services must apply for a state-by-state license to operate lawfully within the United States.
Several arrests were made in 2020 and 2021 around the illicit operations of crypto mixers. Roman Sterlingov, founder of "Bitcoin Fog", Larry Harmon, owner of another crypto mixer service called Helix, and an Ohio citizen running a mixing service, received arrests on allegations of facilitating unregistered money transmission services and money laundering. Some crypto exchanges now block funds that show a history of mixing. For example, Binance blocks withdrawals to Wasabi Wallet and refuses the receipt of mixed Bitcoin.
Legitimate Reasons for Using a Bitcoin Mixer
There are more people who interact with crypto mixers for legitimate lawful reasons than those who don’t. Blockchain is a peer-to-peer, borderless, and transparent technology. While transactions go through a cryptographic hashing process to maintain privacy, if some matches your real-world identity with a crypto wallet address, then it is easy to follow the movement of all funds to and from that wallet.
Therefore, large businesses and high-net-worth individuals will often seek ways to minimize the publicity of the movement of large funds. In addition, from an enterprise perspective, competitors could view the transactional history of supplier details and the cost of operations. Unfortunately, high-net-worth individuals are more vulnerable to hacks and attacks if their wallet address and real-world identity are known. As such, using a Bitcoin mixer can provide an extra layer of security when moving funds.
Another demographic frequently interacting with crypto mixers is the idealists holding the philosophy of removing monetary transactions from government tracking. People who value the utmost privacy and anonymity with cryptocurrencies are likely to partake in Bitcoin mixing activities.
Can You Trace Transactions in a Bitcoin Mixer?
Bitcoin mixing or tumbling is notoriously difficult to trace. However, it is not impossible. As we have already discussed, centralized crypto mixers will often keep a record of the connection between transactions through the mixing service. Thus, the centralized point of failure vulnerability means it would take only one hacker to reveal thousands of covert transactions. Plus, there are certainly other aspects worth bearing in mind.
Financial security and auditing firms can collectively aggregate the known wallet addresses of potentially malicious actors with public blockchain data. Data points, including transactional amounts, the timing of transactions, and movements to various wallets, could leave a pattern to reveal the real-world identity. For example, there will be relatively few people executing transactions with the exact same amount as you. Therefore, if law enforcement agencies monitor the movement of funds from primary suspect wallet "A" and a similar amount (minus the mixing fee) appears in secondary suspect wallet "B", it will become relatively easy to follow the money.
Explaining Crypto and Bitcoin Mixers - Summary
Crypto mixers offer a way for users to anonymize the movement of cryptocurrency funds between wallet addresses. There are different types of Bitcoin mixer services with varying models of operation. However, all crypto mixers provide the same overall service of increasing privacy and security. As a result, crypto mixers provide an opportunity for malicious actors to launder illicit currency. That said, most people using crypto mixer services do so with legal and legitimate reasoning.
The legalities surrounding interactions with a Bitcoin mixer depend on one's jurisdiction and sometimes intentions. There are plenty of legitimate reasons to use a crypto mixer provider, including the protection of wealth and business operations. Moreover, users have a choice between custodial and non-custodial services. Users can either send funds to a trusted third-party provider or interact with a mixing protocol operating on the blockchain. Although crypto mixers can, by design, mask the history of transactions on the blockchain, it doesn't necessarily mean funds are entirely untraceable. It is always worth doing your own research before using a Bitcoin mixing or tumbling service.
To expand your blockchain knowledge further, check out our free Moralis and Moralis Academy blogs! Why not see our “Exploring Chainalysis” and “NFT Royalties Explained” articles next? Alternatively, see our “Quantum Computing and Blockchain” article to learn more about this cutting-edge industry! If you’re considering a career in Web3, then look no further! Moralis Academy is the perfect place to start - even for non-programmers! Discover how blockchain can integrate with existing IT systems with our Blockchain Business Masterclass course! Kickstart your blockchain career today with the world’s leading Web3 development education suite, Moralis Academy!
