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What are Bitcoin mixers and why are exchanges banning them?

Bitcoin transactions are easy to track, except when the sender uses a mixer to confuse the link between their cryptocurrency address and their identity in the real world.

One of the original attractions of cryptocurrencies is that their use provides the sender or recipient anonymity, but this is a common mistake in the industry.

Actually, Bitcoin (BTC) and many other cryptocurrencies can be easily tracked.

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Proof of this came earlier this week, when US authorities detained the mastermind behind Bitcoin Fog, a darknet-based BTC mixing service, on April 27. The authorities managed to capture the operator after analyzing ten years of data available on the BTC blockchain.

It doesn’t take a forensic analyst to know that all transactions are linked to addresses on the blockchain and that they will stay there forever. Although government agencies cannot find the IP address or the personal data of the address, these currencies often end up being used for the payment of products or services. This is the trace that leads back to the sender and the recipient.

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In the case of Bitcoin Fog, authorities were able to identify server hosting expenses paid with digital currency. Bitcoin mixing services, such as Bitcoin Fog, allow users to mix their currencies with those of other users, making it almost impossible to detect destination addresses. This confuses the links between the inbound and outbound addresses, providing a higher level of privacy.

Mixing services are offered in a wide range of methods, from fully centralized solutions where trust is required, to Coinjoin mixers, which rely on a large group of users to self-cooperate and act at the same time. There is even the possibility of using decentralized exchanges (DEX) to eliminate practically any possible tracking.

Mixers pose some risks

Centralized mixers offer the obvious single point of failure problem. Even if you trust that the entity is using multi-signature addresses, if the service is willing to share your data or has been compromised, its users will lose their privacy.

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CoinJoin solved this problem by combining the contributions of multiple users into a single transaction. The service takes those coins, turns them into a transaction, and has each participant sign it before transmitting it to the network. These transactions are later merged into one, and each user receives the original amount in return. However, no one can see the origin of those coins, not even the entity that merges the transaction.

Although CoinJoin is not exactly untraceable, it provides a plausible denial, as no one can pinpoint which entity owns which output. The greater the number of participants, the greater the degree of denial.

Some cryptocurrency users also need anonymity to send tokens to their wallets, and Wasabi Wallet has long been used for its built-in CoinJoin functionalities.

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Although its infrastructure is technically centralized, its design ensures that operators cannot de-anonymize users or steal any funds. At the moment, Wasabi Wallet is only available for desktop solutions, so, as with everything related to cryptocurrencies, beware of clones!

A similar service is provided by Samourai wallet, which also offers a Chaumian CoinJoin mixing service, called Whirlpool. To get a total privacy solution, users have to connect the Samourai wallet to their own full Bitcoin node. However, it does offer desktop and mobile versions.

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Although these mixing services are not illegal in most jurisdictions, some exchanges and services may reject users linked to addresses associated with coin mixing activities.

As more people realize the importance of achieving a certain level of privacy to protect themselves, the less incentive companies will have to deny their customers the use of mixers.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Each investment and commercial movement involves risks, you must do your own research when making a decision.

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