What Are Coin Mixers and How Do They Work?

The nature of blockchain technology does not completely conceal users’ identities but is pseudo-anonymous, and open to everyone around the world. The movement of funds can be tracked and marked using a blockchain explorer.

This is to some a veritable feature of blockchain technology which is fundamental to the principle of the “distributed public ledger.” While some in the larger crypto family believe that it exposes users’ trading activities and in a way negates the privacy and security that blockchain technology seeks to achieve, thus, creating a lead for criminals and law enforcement agents to track and mark your cryptocurrency transactions and channel of flow.

Very skilled hackers can use this “lead” (information) to carefully monitor users’ transactions and can launch malicious attacks such as ransomware, phishing, and dusting attacks, on users’ accounts, hence, the need for more privacy and extra security.

This brought about the need for the Coin Mixers, which provides an avenue for whale investors or traders, and institutions to safeguard their identity from public scrutiny while carrying the movement of funds from one wallet address to the other.

What Is a Coin Mixer?

A coin mixer is defined as a service that blends various streams of cryptocurrencies or tokens in an automated pool, enabling the anonymous transfer of digital assets from the sender to the receiver, keeping the transactions private and free from public attention.

Also, the idea of coin mixers in the crypto space is to preserve the anonymity of users and prevent undue scrutiny and monitoring. Furthermore, the coin mixer employs the services of software companies whose responsibility is to mediate between two or more traders looking to exchange cryptocurrencies or tokens.

Thus, the service aims to ultimately alter the chain of the flow of digital assets that’s from sender to receiver, hence obfuscating the movement of funds between the parties involved. This has increased the anonymity envisioned by the founders of blockchain technology and also made the flow of funds difficult to trace, thus, ensuring the privacy and to a large extent the security of those involved in the transaction.

Coin mixers offer great benefits to whale investors and institutions by ensuring anonymity, and privacy of their transactions, cybercriminals on the other hand, also make use of them for fraudulent purposes.

Are Coin Mixers Legal?

Several arguments have ensued as to the legality of coin mixers and questions about the rationale of mixing cryptocurrencies or tokens have been raised severally; while proponents of decentralization and anonymity of users’ transactions strongly believe that coin mixing is a way to go in the actualization of users’ privacy and security — the fundamental objectives behind blockchain technology and decentralized finance (DeFi) — and further blocking third party’s undue control over users’ financial transactions.

But, pundits argue that their activities have greatly encouraged criminality and frustrated the tracking and apprehension of criminals and terrorists who find a soft landing with coin mixing to perpetuate their nefarious activities. And, also stresses the risks involved with trusting a faceless agency (third party) with your fortune (digital assets) who may rug pull on receiving your funds.

Generally, both arguments are valid with the first group pointing to the pros of coin mixers while the latter focuses on the cons. The underlying question is, what is the percentage of illegal activities supported by coin mixers?

A recent report by blockchain intelligence firm, Chainalysis points to the fact that there’s an increase in the laundering of illicit funds in mixers thus, fueling the activities of cybercriminals and hackers.

The firm found that “illicit addresses account for 23% of funds sent to mixers so far in 2022 up from 12% in 2021.” Most of these funds were from “sanctioned mixers” aiding and abetting money laundering and other criminal activities with well-known collaborations with some nations’ intelligence.

Nevertheless, coin mixers are legal in some countries including the United States, and operate based on certain regulatory frameworks. Many users and institutions in these countries have used them for legitimate purposes to conceal their transactions. While some countries have outrightly banned the activities of coin mixers, arguing that they facilitated criminal activities such as money laundering, a darknet market, and financing terrorist activities, among others. So in these countries, coin mixing is highly illegal and not in operation.

The above report doesn’t favor coin mixers, might fuel a crackdown, and may become unfavorable to genuine crypto traders who just wanted privacy and anonymity. As already envisioned by Chainalysis, “Crypto mixers may soon become obsolete as Chainalysis refines its ability to demix transactions.”

Crypto Laundering

Crypto laundering is on the increase and many believe that it’s being fueled by coin mixers as money launderers have a safe place to clean their stolen funds, with support from nations, thereby institutionalizing cyber fraud and other criminal activities.

Also, having an avenue where coin mixers provide a cleaning service for illicit funds and a cover for senders and receivers will further boost money laundering and encourage high-scale criminality.

In recent times, the cybercrime industry, most especially the ransomware scene, has stepped up, increasingly becoming more active than before. Cybercriminals are taking advantage of Ransomware as a service, a concept abbreviated as (RaaS), to steal and empty traders’ wallets.

The good news is that many law enforcement agencies across the globe have been able to pursue every iota of ill-gotten digital money, taking stringent actions even to the detriment of crypto mixers and their operations.

How Do Coin Mixers Work?

Here is a simple algorithm by which coin mixing works:

The owner sends coins to the pool (coin mixer) by connecting his wallet, such as Metamask or Wallet connect, etc to the coin mixer and deposits a particular amount of coins he intends to mix and send to the receiver.

Other users’ coins are mixed with it, and after that, the mixed currency would be transferred to a designated wallet address. The implication here is that no connection exists between the original transaction and the recipient’s wallet address.

It is very important to understand that regardless of the operating model of coin mixing services, there is a transaction fee of 0.25 to 3% that is charged per transaction. The higher the volume, the more costly the transaction fee, and vice versa. The transaction fee is to cover profit margins and/or the price of sustaining the mixer.

Furthermore, there are several options available for users to withdraw funds to the wallet address of their choice. Some mixers put additional security measures to ensure that certain transactions remain anonymous and some of these security measures, include Ring and zk-SNARKs.

Types of Coin Mixers

There are two types of coin mixers:

1. Centralized (Custodial) mixers
2. Decentralized (Non-custodial) mixers

Centralized Coin Mixers

In centralized coin mixers, obfuscation-based mixers are factors applied as part of custodial service, to hide the transactions of users. This enables users to send their Bitcoin (BTC), Ethereum (ETH), or Solana (SOL) to the coin mixer and also to send different cryptocurrencies to the receiver after paying the transaction fees.

Centralized coin mixing is simple and effective for cryptocurrency use; it is simply a way of tumbling or mixing coins or tokens. They can handle all the operational duties and complexities, giving room for a smooth, simple experience for customers. Example; Blender.io.

Despite the advantages of third-party centralized crypto mixing, there are also disadvantages, for example, services provided by these coin mixers mostly have higher fees than those services offered by decentralized coin mixers.

There’s no guarantee that the third-party mixer will bring back the funds of users. Hence, it is highly vulnerable as the funds of users are susceptible to being stolen by thieves. Another issue is that the mixer is prone to exposing the connections existing between senders and receivers when pressured by law enforcement agencies.

The popularity of centralized mixers is fading off, as they belong to the first generation of mixers.

Decentralized Coin Mixers or Peer-to-peer

Decentralized coin mixers give room for users to exchange coins without the need for a third party, as the transactions are automated using a smart contract. They operate around a network of hundreds or thousands of computers (nodes).

By using protocols like CoinSwap, JoinMarket, CoinJoin, or SharedCoin, clients can join forces to carry out several transactions, and as the required number of participants inclines, they make adjustments. Also, the mixer does not store the addresses of both senders and receivers, as they are programmed to mix and transfer funds.

Another important benefit of decentralized or peer-to-peer (P2P) coin mixers is that they offer the provision of non-custodial service, making it possible for users to interact with the mixer and have complete access to their funds.

There’s no need for KYC requirements in decentralized coin mixers, therefore they are borderless and permissionless. The protocol can redistribute them efficiently and fairly in a manner, by pooling the funds from several many users.

Zero-knowledge platforms (ZK) or obfuscation-based platforms (OBF) have become the most usual manner of decentralized crypto mixers. Notwithstanding, the trouble associated with zero-knowledge proofs exists in their cryptographic complexity, and this is also an issue regarding the scaling of the products.

As with centralized mixing services, decentralized crypto mixer protocols may help hide and anonymize the history of cryptocurrency transactions.

Decentralized protocols, just like centralized protocols, offer users admittance to the finances of their choice, this causes them to assume more responsibility on their own. ConJoin, Wasabi Wallet, Sparrow Wallet are all decentralized mixers that are the most well-known in the crypto industry.

How Do Centralized and Decentralized Mixers Work?

Centralized Mixers

In this centralized mixing service, users bring in their e-wallet addresses on the platforms, and afterward, they send the specific cryptocurrency amount they want to “mix” to the centralized platform. By this, the user allows the agent absolute control of making multiple transactions aimed at “mixing” the user’s crypto assets. What we mean by the agent is a specialized algorithm that randomly performs multiple transactions.

Decentralized Mixers

Users attempt to eliminate intermediaries in this service. This way, the users form together to choose the crypto assets they wish to “mix”, to carry out small transactions between users who operate on the same platform. In Decentralized Mixers, we know also, that the higher the number of users in the service, the higher the randomization process.

Differences Between Centralized and Decentralized Mixers

In terms of anonymity, decentralized mixers are the best. This is because decentralized mixers offer higher levels of anonymity to users than centralized mixers. The centralized mixer can under pressure or for some selfish reasons disclose users’ data because of the access to their IP address. Thus, to a great extent, the address of the sender and that of the receiver are not private as intended.

On the other hand, decentralized mixing platforms can be susceptible to attacks that could result in the exposure of the user’s data, thereby breaching privacy and anonymity.

In a nutshell, decentralized mixers offer key benefits when compared to centralized mixers: first, is the granting of full control of assets to users, because when the mixing process completes, a check takes place to find out if the amount coming is equivalent to the mixed amount performed through signatures. By doing so, they can easily be able to prevent the loss of crypto assets from coin mixing.

From the foregoing, due diligence and careful research should be undertaken before choosing between the two as there are so many scam mixers available.

Conclusion

In many respects, coin mixers are important for protecting crypto traders’ identity and safety, enabling whale investors and institutions to freely carry out trading activities with the assurance that their safety is guaranteed.

Nevertheless, the biggest challenge confronting coin mixers is that they provide cover for cyber criminals who find it easier to launder stolen funds. The recent report by Chainalysis suggests that a lot needs to be done by all stakeholders in the crypto industry as cyber criminals and hackers are taking undue advantage of coin mixers.

Nevertheless, coin mixers have their pros and cons, hence the need to adopt sophisticated technology and implement certain regulations aimed at preventing criminal activities while encouraging legitimate usage of the service as we shouldn’t throw away the baby with the bath water.