This is the third installment in our series exploring the landscape of crypto mixing research. This report focuses exclusively on the decentralized crypto mixing services and concepts that have emerged within the cryptocurrency space. For a comprehensive overview of centralized mixing projects, we direct you to our second report in this series.
Privacy is a fundamental right, and in the digital realm, protecting financial privacy is paramount. Many projects and tools have been developed to enhance user privacy in cryptocurrency transactions, often designed with the average citizen’s benefit in mind. These peer-to-peer privacy tools aim to provide a layer of anonymity, allowing individuals to transact without revealing their financial history to the public.
However, as with any technology, the potential for misuse exists. While these services are intended for privacy, some have unfortunately been exploited for illicit activities, including money laundering. Certain mixing services have even been promoted or implied as tools for such purposes, and some have been accused of facilitating these activities without actively preventing them. This report aims to shed light on these decentralized services, their operational principles, and their impact on the privacy landscape.
The Evolution of Decentralized Mixing Concepts
Before diving into specific decentralized services, it’s crucial to understand a fundamental concept: any centralized service that aggregates funds inherently possesses the potential to function as a mixing service. This is because criminals can deposit their funds into a large pool, making it difficult to trace the origin of specific coins without the cooperation of the service provider.
Historically, cryptocurrency exchanges were often utilized in this manner. Users could send funds to an exchange and then withdraw them to a different address, effectively “mixing” them with the exchange’s overall funds. While this method offered a degree of obfuscation, modern exchanges have implemented robust Know Your Customer (KYC) and Anti-Money Laundering (AML) policies to mitigate such misuse.
Today, we see similar practices with swap services and exchanges like FixedFloat and EXCH, where users can chain-hop, exchanging coins on one blockchain for another, further obscuring transaction trails.
However, our focus here is on services explicitly designed and marketed as mixing solutions, particularly those that operate on decentralized principles.
Notable Decentralized Mixing Services and Their Operations
One of the earliest and most well-known decentralized concepts in this space is CoinJoin. This privacy-enhancing technique allows multiple users to combine their transactions into a single transaction. By pooling inputs and outputs, it becomes significantly harder to link a specific input address to a specific output address, thus breaking the chain of transaction history.
Join Market stands out as an early decentralized peer-to-peer protocol that implemented the CoinJoin concept. It connects users seeking to mix funds (“takers”) with those willing to facilitate CoinJoin transactions (“makers”). Takers pay a fee to the makers, and all transactions occur without a central authority. Join Market also introduced innovative mechanisms like fidelity bonds to deter Sybil attacks and prevent attempts to de-mix transactions.
Tornado Cash gained significant popularity as a decentralized mixing service on the Ethereum network. Users could send their crypto assets to a Tornado Cash smart contract, which then mixed these funds using zero-knowledge proofs to obscure the link between the deposit and withdrawal addresses. Being a smart contract, Tornado Cash offered a high degree of decentralization and censorship resistance. However, the arrest of its developers led to a significant decrease in its liquidity, impacting its effectiveness as a mixing solution.
Beyond Tornado Cash, other projects have leveraged the CoinJoin concept. Wasabi Wallet was a desktop wallet that utilized a trustless mixing technique based on the zero-link framework, employing CoinJoin with Tor for enhanced anonymity. It allowed users to mix their Bitcoin inputs and specify output addresses anonymously, incorporating multiple outputs with other participants to further obfuscate the transaction trail.
Similarly, Samurai Wallet offered a CoinJoin-based mixing service called Whirlpool. While sharing the core principles of CoinJoin, it had distinct features. Whirlpool transactions were limited to five outputs, and it introduced concepts like “free riding” and “remixing.” Free riders are participants who pay the mixing fee for the entire CoinJoin transaction, incentivizing others to participate without direct cost. Remixing allows users to further mix their already mixed coins, increasing their anonymity set. This incentivizes both new and existing users, providing higher liquidity and enhanced privacy.
Exploring Other Decentralized Privacy Enhancements
Several other protocols and concepts have been proposed or explored in the realm of decentralized mixing.
Coin Shuffle represents a decentralized mixing framework where participants collaboratively shuffle their transaction outputs.
TumbleBit offered a different approach, a centralized model that utilized blind signatures and RSA-based puzzles to ensure the mixer couldn’t link senders and recipients. However, the core concept relied on a trusted intermediary.
Coin Swap, introduced by Chris Belcher and implemented in Mercury Wallet, offered a way to directly exchange coins with another user. This involved a process that resembled the exchange of private keys, utilizing the concept of state chains to facilitate the transfer of ownership.
In conclusion, the landscape of decentralized crypto mixing services has evolved significantly, with projects like Join Market, Tornado Cash, Wasabi Wallet, and Samurai Wallet pioneering innovative approaches to enhance transaction privacy. While some have faced challenges and legal scrutiny, the underlying principles of CoinJoin and other decentralized techniques remain crucial in the ongoing pursuit of financial privacy in the cryptocurrency ecosystem. This report highlights the key concepts and implementations in this evolving field, emphasizing the ongoing efforts to empower users with greater control over their financial privacy.