Many believe that Bitcoin is anonymous, but it is actually a pseudonym. Anonymous means that a person’s identity is completely unknown, while an alias means that someone is using another name but their identity can still be known.
For example, in the case of a Bitcoin wallet, transactions usually don’t include your name, but a Bitcoin wallet is a string of numbers and letters associated with your account. Therefore, this is indirectly an alias because your identity has been replaced by another name like “7Hkiji79767nnsoijs79rk55kn4mm”. We cannot directly know that this wallet is your wallet, but given the pattern that repeats itself, this Bitcoin wallet may be associated with your identity based on the data obtained from the blockchain.
Since the blockchain is transparent, Bitcoin does not directly provide privacy but users have the option to be as transparent as publicly as they like.
For those who do not want their transactions to be known to the public, they can use CoinJoin or Bitcoin mixer. In this article, we will discuss more about what the Bitcoin mixer, CoinJoin, is, and its uses.
What is a bitcoin mixer?
Coin Mixer is a way to increase the privacy of Bitcoin transactions where multiple users combine UTXO (Unspent Transaction Output) into one large transaction with multiple inputs and multiple outputs. Bitcoin transactions usually consist of one sender and one receiver. So we can find out which of the input corresponds to the output and vice versa. The purpose of transactions with a Bitcoin Mixer consisting of multiple inputs and outputs is to break patterns within the blockchain.
Why use a bitcoin mixer?
There are many reasons why people want to use a Bitcoin synthesizer, the main reason being privacy and they don’t want the world to know why they want to use their crypto assets.
For example, Alice is a whale (a person or entity with a large amount of cryptocurrency) who has 10,000 BTC in her wallet. Without a coin mixer, one can use Alice’s wallet address to find out Alice’s balance. If someone finds out that Alice has a large amount of bitcoin, she could be the victim of a hacker attack, theft, or even a hijacking. To ensure that Alice has a higher level of privacy, Alice can use a coin mixer so that her identity is not known to the public during the transaction. Thus the Bitcoin transaction cannot be traced back or linked to Alice’s identity.
How does the bitcoin mixer work?
The coin mixer basically works by taking your bitcoins, mixing them with other bitcoins, and then sending smaller units of bitcoins to the address of your choice along with the total amount you enter. The coin mixing service providers usually get 1-3% profit of the total transaction as coin mixing fee.
For example, enter Alice, Bob, Charlie, and Daisy 2, 4, 6, and 8 BTC for a total of 20 BTC. While the currency mixer has transaction services worth 3%. The coin mixer will generate 20 separate new outputs of 0.97 BTC each (minus 3% of the coin mixing service fee). The output will be distributed to each user in an amount equal to their initial contribution.
What can a coin mixer do?
- Amount Decorations: – Alice makes two regular Bitcoin payments to two anonymous Bitcoin addresses, both of which cannot be tied to the 0.5 BTC that Bob ends up being.
- Decor Time: – Alice chooses exactly when each cache is sent to her. Alice also chooses exactly when Bob is finally paid.
Group Relationship: The wallet (or block) Alice sends her bitcoins, not at all connected to the wallet paying Bob.
All transactions appear to be regular payments between users on the blockchain. Nobody knows that a bitcoin mixer was used.
Is Bitcoin Mixer Safe?
Coin Mixer acts as a custodian service meaning that when you send Bitcoin to a company that provides coin mixing services, you fully trust your Bitcoin in their hands. This can be dangerous if you don’t know which companies are good or bad. Maybe the coin mixer company can take your bitcoins.
What is CoinJoin?
After explaining what the above Bitcoin mixer is, we will now discuss about one such application, which is CoinJoin. CoinJoin is a model of a coin mixer but unlike a Bitcoin mixer as a service, CoinJoin is part of the software. CoinJoin users have full custody of their coins.
For example, Alice, Bob, Charlie, and Daisy enter 2, 4, 6, and 8 BTC for a total of 20 BTC, and a CoinJoin transaction will produce 20 separate outputs of 1 BTC each. The output will be distributed to each user in an amount equal to their initial contribution. Since each output has the same value, in theory it would be very difficult to find out which new bitcoin address is now controlled by each of the four original users.
The difference between CoinJoin and a coin mixer is that CoinJoin is a software, while a coin mixer is usually a company that provides services. Technically, CoinJoin is legalized but the coin mixer is not.
Based on FinCEN regulations, CoinJoin can be classified as a sending, calling, or network access service used by money senders to support money transfer services.