Bitcoin Mixers: How Do They Work and Why Are They Used
The dawn of Bitcoin’s inception introduced the most convenient way of anonymizing online payments. At least, that was the belief at the time. People familiarized themselves with the blockchain as time went by and discovered that the technology’s public feature stored data. These records were accessible to anyone and could reveal the transaction history of any chosen address.
Now, the relevance of crypto anonymity is worsening. After fraudsters became prevalent in the space, governments imposed a Know Your Customer (KYC) mandatory process on exchanges and selected crypto platforms. That means the transaction history of a wallet address can be tracked to its user if they are registered on a KYC-enabled exchange.
People who value their privacy must be wondering if there is a way to make bitcoin transactions anonymously. Well, that’s where bitcoin mixers come in. Bitcoin mixers, also referred to as tumblers, reroute Bitcoin transactions with the help of its complex semi-random networks and private pools. Keep reading and find out how Bitcoin mixers work and why you should use one.
How Do Bitcoin Mixers Work?
First, Bitcoin users transfer their coins to a mixer of their choice, mixing them with other transactions to disconnect the link between the original sender and the intended recipient.
In layman’s terms, a bitcoin mixer is a detour point consisting of programs that blend a web of transactions before the designated funds reach the recipient. For instance, if a sender transfers funds from their wallet #namedW, the said coins are first directed to a mixer with a wallet address #namedX. The bitcoin mixer then mashes up the transaction records with other coins, thus creating a new address #namedY and transfer the funds to the recipient address #namedZ.
Funds sent from Wallet #namedW to #namedZ will have no connection since the mixer introduced new receiver and recipient wallets #namedX and #namedY, respectively.
Note: The recipient address will receive a slightly lesser amount to account for the Bitcoin mixers’ fee, which is 0.25 and 3% of the transaction amount. Also, don’t forget to factor in the transaction fees in the bitcoin network.
Types of Bitcoin Mixers
There are two types of Bitcoin mixers: centralized and decentralized mixers.
Centralized Bitcoin Mixers
Centralized bitcoin mixers, also called custodial mixers, are third-party entities that accept bitcoin payments and send back different bitcoins. An example of a centralized bitcoin mixer is Blender.io.
While centralized Bitcoin mixers offer a more straightforward solution to mixing and charge lower rates, they suffer from two significant flaws:
- Centralized Bitcoin mixers can keep users’ mixing logs which contain personal details of users who sent and received coins from the mixer. Since this data is available, centralized Bitcoin mixers may be compelled to share the mixing logs with governments and blockchain forensic experts when investigating financial crimes.
- As a third-party entity, users’ transactional details can be lost in the process resulting in the funds not reaching the intended destination. After initiating a transaction, the mixer could refuse to make your return payment, basically getting away with your funds.
Decentralized Bitcoin Mixers
Decentralized Bitcoin mixers, also referred to as non-custodial mixers, don’t require a third party. They leverage smart contracts or protocols such as CoinJoin to encrypt crypto transactions. Decentralized Bitcoin mixers typically pool large groups of people, usually up to 100 people looking to mix a certain amount of Bitcoin. The pooled amount is then redistributed to the number of users gathered, each getting their intended funds minus the service costs.
Since they don’t keep a mixing log, decentralized Bitcoin mixers guarantee complete anonymity and privacy. However, they are not ideal for beginners because they are technical and require a certain amount of users to be efficient.
What Are the Features of a Good Bitcoin Mixer?
When looking to choose an ideal Bitcoin mixer, there are several factors you should consider, including:
- Full anonymity
- Fair fees
- Availability of multiple addresses
- Zero transaction fees
- No maintenance of mixing logs and user records
- Quick transactions
Benefits of Bitcoin Mixers
While Bitcoin mixers have been associated with “cleaning” illicit Bitcoin obtained from illegal activities such as cybercrimes, money laundering, and drug trafficking, they play a crucial role in ensuring the complete anonymity and privacy of Bitcoin users.
There are several benefits of keeping Bitcoin transactions private and anonymous but keeping them away from fraudsters’ radar remains the most practical. Bitcoin whales are highly recommended to use mixers when transacting with large amounts.
Another benefit of using a Bitcoin mixer is overcoming strict government regulations on Bitcoin, including heft taxations.
Concerns with Bitcoin Mixers
The biggest concern with Bitcoin mixers is that they create the best playgrounds for perps to circumvent governments’ sanctions restricting criminal activities online. Mixers make it hard for financial watchdogs to investigate and track criminals, such as hackers, money launders, and drug traffickers.
Anonymity conditions presented by mixers have been a nightmare for law enforcement agencies and forensic analysts to do their job to the extent of banning them in several countries. In the U.S., mixing large amounts of coins violates anti-structuring laws. For instance, in April 2021, Roman Sterlingov, the man behind Bitcoin Fog-a Bitcoin mixer, was arrested by U.S. federal authorities and charged with money laundering and unlicensed operations.
Other concerns with Bitcoin mixers include high fees, which might not be convenient for small transactions and are extremely expensive for transactions with large sums of money. Lack of trust is another concern considering that some Bitcoin mixers, such as BitMixer.io, have closed without notice going away with users’ coins.
Understanding how bitcoin transactions are done is a Gordian knot for most folks to unfold. Then doubling that by grasping how bitcoin mixers work could seem impossibly difficult. However, the above texts should prove fruitful in your research if you are in your infancy period of finding your way around cryptocurrencies or are a pro looking into spicing up your online payment transactions. Just don’t forget to include the network fees and transaction costs when using mixers.
Frequently Asked Questions
How anonymous do bitcoin mixers render transactions?
Since the mixers jumble up the addresses involved in transactions (through a dark wallet), it is hard to follow up on them on a public ledger. Likewise, they do not withhold any private user data, keeping their identities safe. Overall, the mixers ensure transactions remain anonymous and secure on the blockchain
Are bitcoin mixers used for illegal activities?
Considering their efficiency in mixing up addresses, bitcoin mixers come in handy in illegal activities. Even though using them is not unlawful, exploiting their technology for illicit activities such as money laundering stands against regulations.
Is there a difference between a bitcoin mixer and a bitcoin tumbler?
A bitcoin mixer is the same as a bitcoin tumbler. Both return the much-needed privacy in the crypto space as exchanges require personal information for KYC procedures. As mentioned earlier, they do not store user information; rendering transaction addresses anonymous.