The Role of Crypto Mixing in Preventing Financial Surveillance
History of bitcoin in most networks is publicly available, and any user can access the browser to view information about a specific address. For example, this can be done using GetBlock Explorer. While cryptocurrency wallets themselves do not provide information about their owners, there are methods of analyzing the cryptocurrency market that can track the identity of the owner of a particular wallet. This caused an increased interest of users to increase their anonymity in the online environment.
Crypto mixing as a means of protecting personal financial information
There are various services on the market, known as crypto mixing, that help hide the identity of the owner and the connection of the coin with him. Such services can be centralized or decentralized.
Centralized crypto mixing are companies that receive cryptocurrency from the owner for a fee and send an equivalent amount of other coins to the owner’s address. However, such faucets do not guarantee complete confidentiality. If it is necessary for law enforcement agencies, they can request any information from these centralized services.
Can crypto mixing help prevent financial fraud?
In most cases, centralized services require registration and identification. They also charge a commission (usually 1-3%), which will be randomly set to make it difficult to track transactions. Usually such services use deferred transfers, so customers can receive their coins within a few hours or days. To increase anonymity, such services can send cryptocurrency from different wallets to the user’s address.
Decentralized crypto mixing offer various ways of mixing coins. They use smart contracts to carry out operations with coins. Such protocols are based on the idea that allows random users to mix coins and redistribute them in such a way that each participant receives the same amount, but the coins are different. In this system, no participant knows who gets the assets and where they come from.
The work of decentralized crypto mixing looks like this:
- Users contribute their cryptocurrency to the cryptomixer’s smart contract pool.
- Cryptocurrencies are mixed with the assets of other smart contract participants.
- A user who has mixed his assets from another wallet can request these assets back. The protocol uses various cryptographic methods, such as ring signatures, to confirm the rights to coins when withdrawing funds.
- Users receive the same amount of funds, but different coins.
The main advantage of decentralized crypto mixing is increased anonymity. No transaction histories are recorded, and other smart contract participants cannot be tracked. However, such protocols are open, and anyone can check their code.
It should be noted that some crypto mixing can mix “dirty” cryptocurrencies, unknown to users, with “clean” assets. According to a Chainalysis study, approximately 11% of all mixing operations are related to illegal activities. This means that fraudsters can use such services to transfer illegal funds to ordinary users. As a result, crypto exchanges and other services can block the account and freeze all funds. Some companies, such as Tether, have the right to freeze user assets if they are associated with illegal activities or are located at authorized addresses. Similar rules are applied by other companies.