Bitcoin right now is not really anonymous . While Bitcoin addresses aren’t necessarily linked to real-world identities, they can be. And it’s possible to learn a lot about who’s using Bitcoin, and for what, by monitoring the unencrypted peer-to-peer network or analysis of the public blockchain, as well as through Know Your Customer (KYC) or Anti-Money Laundering (AML) regulations.
This is not great from a privacy perspective. Bitcoin users might not necessarily want the world to know where they spend their money, what they earn or how much they own, while businesses may not want to leak transaction details to competitors – to name just a few examples.
Additionally, selected bitcoins being traceable, possibly “tainted” and potentially worth less than other bitcoins is at odds with fungibility . These privacy-related issues could even challenge Bitcoin’s value proposition as money.
But there are potential solutions to increase privacy and improve fungibility.
One of the oldest tricks in the book is coin mixing. More recently, this trick was dusted off, improved and re-introduced in the form of “coin shuffle” protocols.
Traditional Mixing
The concept of mixing coins is not too complicated.
If two or more people wish to obfuscate the trails of the coins they control, they can simply exchange their coins with one another. Each participant of such an exchange will end up controlling coins with a history that’s not theirs, while ridding themselves of any coins that do reflect their own activity.The most straightforward way to mix coins is for users to simply connect, for instance on an internet forum, and agree to send each other specific amounts of coins. However, this option has obvious downsides. Not only must two or more users wish to exchange coins at more or less the same time (and be able to find each other) ‒ they must […]
