Bitcoin Mixer: How It Works and Who Needs It
Cryptocurrencies differ from fiat money in terms of anonymity and decentralization. Most blockchains don’t guarantee privacy, though, because they store all data on transactions made in their own coins or supported tokens. Verification on centralized exchanges also has a negative impact on the non-disclosure of private information. Bitcoin mixers help to solve this issue.
What it is
Bitcoin mixer is a service that anonymises cryptocurrency transfers. It significantly complicates or makes it nearly impossible to track transfers.
The service works according to particular algorithms. By executing them, it divides incoming transactions into small parts and moves them through different addresses. A destination for all transactions is a recipient’s address.
Types of bitcoin mixers:
- Centralized. A BTC holder sends coins to the address specified by a service and afterward gets the amount (minus the commission) from third parties. The more intermediaries in such a service, the higher the anonymity of a transfer.
- Decentralized. These services don’t have intermediaries — coins are transferred from one user to another. They operate based on protocols, so the probability of fraud is close to zero. User addresses aren’t stored in databases, and info on recipients is sent through a mixing service.
Both centralized and decentralized bitcoin mixers charge a commission for their services. It depends on the transferred amount and the number of mixing operations for increasing anonymity.
Who uses bitcoin mixers and why
Bitcoin mixers are popular amongst crypto anarchists and enthusiasts willing to stay anonymous in their financial operations. There’s just no other way for holders of BTC and other ‘pseudonymous’ coins.
Anonymity is impossible on centralized exchanges. Due to regulators’ requirements, exchanges have to verify users by requesting identifying documents. Crypto users have to comply with these regulations if they want to securely buy and sell bitcoins on exchanges. But when coins are withdrawn, crypto users might use bitcoin mixers to spend them without transaction tracing.
Criminals also use bitcoin mixers. Mixing transactions and entangling traces have proved useful in the criminal activity of hackers, drug dealers, and other shady characters.
How it works
Service operation depends on its type:
- Centralized ones always have a stock replenished with users’ coins, thus forming a common pool. Then, BTCs are distributed from this pool to addresses. If authorities access logs of such a service, they will be able to trace each transaction.
- In decentralized ones, users interact without intermediaries. A server only mixes addresses and simultaneously distributes BTC. Logs are not recorded, and recipient information is not stored.
- Anonymity. The connection between an original sender and a recipient is broken. Even with a full verification of a user on a centralized exchange, it is impossible to prove their participation in a BTC transaction to a specific address.
- Hiding operations from a government. Transaction trace is interrupted when coins enter a mixer. From this moment, it becomes impossible to prove that a particular person has BTC.
- Depersonalized bitcoin payments. This includes purchases, donations, and other financial operations that a person might want to keep private.
- The use of patterns. It’s typical for centralized services that store operation logs and user addresses. In the case of hacking or any other activity that results in gaining access to databases, it is going to be easy for a third party to look into a transaction chain.
- Mixing cryptocurrencies is associated with criminal activities. An ordinary person barely needs to hide their transaction chain if they comply with the law.
- Coins sent to a mixer might get stolen. This happens when hackers attack mixing services. Even unethical service employees themselves might steal users’ coins.
The law doesn’t prohibit using bitcoin mixers, but crypto exchanges don’t approve transactions to/from such services. Their security departments might suspect a user of criminal activity, including money laundering, which will lead to the user’s account getting blocked.