Is it possible for you to mix your Bitcoins with other people’s Bitcoins, and at the same time profit from it? Mixing companies claim it is – but there is a risk.
Privacy is not just for criminals
Many people think that mixing services are primarily used to launder Bitcoins obtained through fraudulent or illegal means. This is not necessarily the case. Privacy is important for everybody. Criminals should not know how wealthy you are, strangers should not be aware of how you spend your money. This is a reason why Bitcoin mixers – Eg. Bitmixer.io – have grown their businesses.
Trust is an issue
Third party mixing companies work in the following way.
You send your Bitcoins to a mixing company, the mixing company combines your coins with its reserves and sends you different Bitcoins to a specified address. You need to trust the mixing company with your Bitcoins and there is a risk that the company might disappear with your Bitcoins.
While some companies have built up a reputation as reliable mixers over the years, this risk still remains. You also have to trust the company not to maintain logs of all the mixing transactions that take place. If logs are maintained and fall into the hands of people with malicious intent, then these logs can be used to unmix the transactions.
While Bitcoin works on decentralized trust, it is ironic that you have to trust third party mixing companies to improve your privacy.
Altcoins with enhanced privacy features
Altcoins such as Monero and Zcash offer enhanced privacy features. Monero uses ring signatures to make it difficult to map inputs and outputs. Monero soared in value in September 2016, when it caught the fancy of Dark Web users. Zcash, which was launched in October 2016, saw heavy demand just hours after its launch. However, a significant portion of Bitcoin enthusiasts would prefer not to shift to an altcoin just to improve privacy.
One of the methods for improving privacy is CoinJoin, proposed by Gregory Maxwell. In CoinJoin, multiple users combine their proposed transactions into one big transaction. If some of the outputs are of the same size, it is impossible to link the input Bitcoins which were spent on that corresponding output. In the simplified example below, A pays 1 BTC to B and C pays 1 BTC to D. If A and C combine their payments, it is impossible to say whether A has paid B or A has paid D. A and C can independently sign the proposed transactions using their private keys and hence there is no risk associated with this transaction, unlike in the case of using a centralized mixer.
Taking CoinJoin a step further
CoinJoin was a brilliant proposal, but it did not take off in the real world. The problem was in finding fellow participants, who wanted to send across the same amount of Bitcoins, at the same time as you. JoinMarket attempts to solve this problem by attracting a new class of participants in CoinJoin transactions – investors.
People who want to initiate a CoinJoin transaction can offer a small fee to incentivize people – investors or market makers – to join them in this transaction. Investors have very low risk – their Bitcoins are mixed on their own computers and are only transferred between addresses they control.
According to Chris Belcher, who is spearheading JoinMarket,
“JoinMarket adoption has been coming along fairly well. Right now it’s only a command line application so generally only people already comfortable with it are using JoinMarket. I’d say right now a bottleneck is development of the code. Market makers on JoinMarket earn about 2-4 percent per year depending on amount. My own personal yield generator takes part in about 20-30 coinjoin transactions per day.”
Some in the Bitcoin community say that companies such as JoinMarket improve the privacy of the community as a whole.