Crypto Mixers: What Are They & How Do They Work? | Notum
Sep 08, 20225 min read
After cryptocurrencies turned up, the functioning of which is carried out in a decentralized network, Internet users could make transfers to each other without the help of intermediaries. Thanks to this, sharing personal information about yourself is unnecessary to make payments. This feature of cryptocurrencies has become one of the main arguments that their supporters put forward to justify the advantages of this technology over conventional electronic money. This advantage has a serious flaw: the cryptocurrency owner only needs to violate security measures once (for example, to purchase crypto on the exchange by a simple bank transfer) for his identity to be disclosed.
As cryptocurrencies are based on blockchain technology, which holds transactions performed inside the system into a completely transparent distributed database. If desired, any user of the system can determine how much cryptocurrency was transferred, when and to which wallets. Thus, the security of users from the point of view of anonymity is imaginary. Fortunately, anonymity adepts have created specialized services —crypto mixers.
What Is a Crypto Mixer?
A crypto mixer is a service, in the form of an app or website, that mixes a certain amount of your coins with coins of other owners, after which the origin of the coins cannot be tracked. This is a way to “confuse the traces” during transactions so that no one reveals where the digital assets in the wallet came from, who they belong to and where they go. Thus, crypto mixers increase the level of security and anonymity.
Why Are Crypto Mixers Used?
Cryptocurrency is a convenient means of payment. With the help of cryptocurrency, fast execution of P2P transfers is ensured. The payment is unknown to the fiscal authorities, and transactions are not carried out via bank accounting registers. At the same time, information about all transactions is stored in a distributed network without reference to a specific person. Data analysis will allow you to track the chain of transfers and identify the initial or final owner.
In addition, the cryptocurrency is used for settlements on the black market, including on the Darknet.
However, anonymizing the transfer is not always associated with illegal actions. There are reasonable reasons to hide a user’s transaction history:
- Transaction security;
- The unwillingness of a particular user to show the presence of an asset.
Crypto mixers are used to:
- Eliminate the possibility for attackers to track transactions of law-abiding owners of digital assets
- Protect personal information;
- Protect against the theft of assets by fraudsters.
Types of Crypto Mixers
There are two main types of mixers — centralized and peer-to-peer.
Centralized mixers are traditional services where the mixing of coins occurs by sending a transaction and receiving the amount back in several transfers from other users selected randomly. If many people use the service, it becomes challenging to link the incoming and outgoing transactions of the same user.
However, there are two problems with centralized mixers:
- First, you need to trust the service itself. After all, it has information about user transactions and, if desired, can transfer it to third parties.
- Secondly, there is still a small chance of falling into the hands of scammers who only disguise themselves as a mixer and simply collect user coins without sending anything in return.
Peer-to-peer mixers are anonymizers that solve both problems of centralized services. Peer-to-peer mixers are platforms where owners of digital assets are grouped to form transactions. None of the participants has information about other users, mixing stages, and proportions. Transactions go through several mixes before they get to wallets. The order and number of coins are determined randomly.
How Does Crypto Mixer Work?
The algorithm for working with the mixer is quite simple and may vary slightly from service to service, but in general, everything looks like this:
- Buy crypto (if you don’t have it yet);
- Send coins to a crypto mixer;
- Coins are mixed. Here you can choose the degree/time of mixing and/or the amount of commission (all these factors are directly related to the mixing quality);
- You receive a letter of guarantee from the crypto mixer, which in case of problems, will help you contact technical support and figure out what’s going on because the mixer does not store or require any data about you;
- You get the same coins, but already from among the mixed ones.
The most crucial thing is to choose a crypto mixer so as not to send your crypto funds to scammers. To begin with, try sending a small amount to check the operation of the service, and if everything goes well, mix a large number of coins.
The Legality of Using Crypto Mixers
In May 2022, the United States imposed sanctions against the popular crypto mixer Blender.io, in August — against the Tornado Cash ETH mixer. Earlier in 2020 and 2021, Helix, Coin Ninja, and Bitcoin Fog were hit.
The reason is that mixers are expected to become an effective tool for criminals. Although technologies for demixing transactions already exist, the use of services is still very common.
At the same time, mixers in most jurisdictions are not considered explicitly illegal. For example, in the USA, they are classified as money transfer services, and each of them is obliged to:
- Register with FinCEN;
- Develop and implement KYC/AML measures;
- Keep records and comply with the requirements of the regulator.
Of course, there is little use from such mixers, where you must pass identity verification. Therefore, at the moment, no known crypto mixer would follow these rules.
Since 2020, the use of mixers has increased significantly, and although the rapid growth has calmed down somewhat in 2022, it remains close to record highs. The increase is due to high volumes from centralized crypto exchanges, DeFi protocols, and addresses associated with illegal activities. According to Chainanalysis, illegal addresses account for 23% of all funds.
Crypto mixers are a problematic dilemma for regulators and crypto community members. It is impossible to deny that financial privacy is the right of every person. But the data shows that cybercriminals benefit the most from such services.
The program's advantage is hiding the history of previous transactions to get “clean” coins. However, using crypto mixers does not provide a 100% guarantee anonymity. It is possible to decipher the transaction history of a coin that has passed the mixing procedure. Clustering analysis is used for this. Clustering analysis is a special technique that helps to decipher many well-known services. So, similar algorithms were created by Bitfury and Chainalysis. With the help of clustering analysis, it becomes possible to establish interconnected crypto addresses even via a mixer.
In addition, among the programs for anonymizing digital assets, some services deceive users. It is possible to identify intruders only by reviews on forums. None of the victims will complain to the police.