Enhance the privacy of Bitcoin transactions with advanced methods

Understanding Currency Mixing and CoinJoin Transactions

Bitcoin is often compared to digital money, but this analogy is debatable. If Alice pays ten euros in cash, Bob will never know where that money came from. And if Bob then gives it to Carol, she will also not know that the money was previously in Alice's possession.

Bitcoin works differently due to its public nature. Anyone can easily track the history of a particular coin ( or more precisely, an unspent transaction output ). It's as if we wrote the transaction amount and the names of the participants on a banknote each time it is used.

However, the pseudonyms of public addresses ensure that users' identities will not be easily exposed. But Bitcoin is not a completely private currency. Blockchain network analysis methods are becoming increasingly sophisticated and can trace addresses and identify identities with growing efficiency. Combined with other surveillance methods, these techniques can reveal the identities of digital currency users. To address this issue, techniques have emerged over the years to obscure the links between transactions.

What is currency mixing?

In general, currency mixing can refer to any activity aimed at obscuring money by exchanging it for other funds. In the cryptocurrency ecosystem, coin mixing refers to a service provided by a third party. Service providers typically take users' currencies ( plus fees) and give them currencies that are unrelated to those sent. These services are also known as tumbling services or mixing services.

The security and anonymity of these centralized services certainly make them questionable. Users have no guarantee that their funds will be returned to them by the mixing service or that the returned coins are not tainted in some way. Another aspect to keep in mind when using mixing services is that your IP address and your portefeuille Bitcoin addresses may be logged by third parties. Ultimately, users relinquish control of their coins in the hope that untraceable coins will be returned to them.

Another method that some find more interesting is that of CoinJoin transactions, which create a high degree of reasonable doubt about the source of the coins. In other words, after a CoinJoin transaction, a user cannot be definitively linked to their previous transactions. Many CoinJoin solutions offer decentralized alternatives to mixing services. Although a coordinator may be involved in the process, users do not need to sacrifice the custody of their coins.

What is CoinJoin?

CoinJoin transactions are a proposal first introduced by Bitcoin developer Gregory Maxwell in 2013. In a series of messages, Maxwell provides an overview of the design of these transactions and explains how they can be used to achieve significant privacy gains without altering the protocol.

CoinJoin is characterized by the combination of inputs from multiple users into a single transaction, while allowing them to retain ownership of their coins. This method creates reasonable doubt about the source of the coins and provides a decentralized alternative to centralized mixing services.

Bitcoin transactions consist of inputs and outputs. When a user wants to make a transaction, they take the unspent transaction output as input, define the output, and apply their signature to the input. It is important to note that each input is signed independently of the others, and users can place multiple outputs ( that is, send coins to different addresses ).

How do CoinJoin transactions work?

The idea is that multiple parties coordinate the creation of a transaction, each party providing the desired inputs and outputs. When all inputs are combined, it becomes impossible to confirm which output corresponds to which user.

We have here four participants who wish to mask the links between their transactions. These participants coordinate with each other ( or through a coordinator) and announce the inputs and outputs they wish.

The coordinator will gather all the information and create a transaction, which each participant will sign before sending it to the network. Once the participants have signed, the transaction cannot be modified without invalidating it. Therefore, there is no possibility for the coordinator to run off with the money.

This transaction is like a black box for mixing transactions. Remember that you can actually destroy unspent transaction outputs and create new ones. The link between the old and new outputs is the same processing, but it is not possible to distinguish between the participants. All we can say is that a participant has provided an input in this transaction and may be the new owner of one of the resulting outputs.

Privacy by denial

The existence of CoinJoin transactions alone is enough to cast doubt on the methods used to analyze transactions. We can deduce that CoinJoin transactions have been carried out in many cases, but we cannot know who the owners of the outputs are. As they gain in popularity, we can no longer assume that all inputs necessarily belong to the same user - a huge surge for privacy in the cryptocurrency ecosystem.

In the previous example, we said that the owner of one of its outputs could be one of the four participants in the transaction, and this number is known as a blind set. The more people in the cryptographic group, the less likely their transactions are to be linked to the original owner. Fortunately, recent implementations of CoinJoin transactions allow users to more easily combine their inputs with those of dozens of other users, without having to trust them, which offers a high degree of plausible deniability. Recently, a transaction involving 100 people was successfully completed.

Final Thoughts

Transaction mixing tools are an important addition to the arsenal of any user who takes their privacy seriously. Unlike the privacy enhancements proposed such as confidential transactions, they are compatible with the protocol as it currently exists.

For those who trust the integrity and conduct of third parties, mixing services are an easy solution. But for those who prefer verifiable and non-custodial alternatives, CoinJoin alternatives are better. These transactions can be performed manually by tech-savvy users, or with the help of software that simplifies more complex mechanisms. There are already a number of these tools whose popularity continues to grow, as users seek to enhance their level of privacy.