Crypto mixers: What they are and what risk is involved with using them

As cryptocurrency grows in popularity, so does the need for privacy of transactions. A crypto mixer is one of the tools to enhance privacy. But using it involves a number of risks and legal implications. Below, we will explore what crypto mixers are, what their types are, and what risk is involved with using them.

Crypto mixer (or Bitcoin mixer) is a service that allows user to mix their cryptocurrency transactions with those of other users for greater privacy. The main purpose of crypto mixers is to make tracing the origin and recipients of cryptocurrency more complicated.

The mechanics of operation of crypto mixers is as follows: users send their coins to the mixer’s address and they are then mixed with those of other users and sent back to new addresses. This makes it extremely difficult, if not at all impossible, to trace the original transactions.

1. Privacy. Initially, the main purpose of using crypto mixers is to increase the privacy of transactions and protect personal data of users.
2. Protection against tracking. But there is also a flip side. Crypto mixers are often used by attackers to complicate blockchain analysis, transaction tracing and, hence, solving their crimes. For example, mixed Bitcoins are the signature style of North Korea’s notorious Lazarus Group. This is why many cryptocurrency services are negative about mixed cryptocurrency, which may involve, for instance, blocking accounts to which it was credited. You can try and get your account unblocked on your own by contacting the platform’s technical support team, and if you fail you can seek help from experts at SEVEN SENSES.
3. Protection of trade secrets. Sometimes companies use crypto mixers to protect information about their transactions and business operations.

1. Centralized mixers. These services are controlled by a central entity. Users send their coins to the mixer’s address, and the crypto mixer mixes them up and sends them back to users. Centralized mixers offer a high level of anonymity, but users need to trust service operators and be sure that they will neither steal their funds nor keep record of transactions.
2. Decentralized mixers. Decentralized mixers operate on smart contracts and do not require trust in a central operator. Examples of such mixers include CoinJoin and JoinMarket. These services utilize complex algorithms to merge transactions from several users without the need to trust in a third party operator.
3. Peer-to-Peer (P2P) mixers. In P2P mixers, users connect with each other directly to exchange cryptocurrencies. These mixers operate without a central intermediary, which increases the decentralization and privacy levels.

1. Mixing. Users send their cryptocurrencies to the mixer’s address. Then the mixer combines funds from different users into a single pool. And after that, mixed funds are distributed to new addresses provided by users. Thus, it is difficult to determine from where and to whom funds were sent originally.
2. Splitting. User funds can be split into several portions and sent to different addresses at different times, rendering transaction tracing even more complicated.
3. Time delay. A mixer may delay sending funds to new addresses, creating time gaps between transactions. This is an extra layer of protection that complicates analysis of transactions.
4. Address reuse prevention. For each transaction, a crypto mixer generates new addresses to prevent them from being reused.

Creating a crypto mixer and using it involve the use of the following technologies.

1. CoinJoin. In this method, several users combine their transactions into one large one. As a result, it is difficult to determine what inputs and outputs are connected with each other. CoinJoin is used in projects such as JoinMarket and Wasabi Wallet.
2. TumbleBit. This Bitcoin mixing protocol uses three phases: signing, mixing, and closing. It provides a high level of anonymity with no need to trust a mixer.
3. ZeroLink. An anonymity protocol that is used in wallets, such as Wasabi Wallet. It combines the CoinJoin method and other mechanisms of protection for maximum anonymity of transactions.

Crypto mixers offer users a number of benefits related to greater privacy and protection against transaction tracing.

1. Increased privacy

• Concealing the origin and destination of funds. Crypto mixers mix funds from different users, rendering tracing the origin and destination addresses of transactions more complicated. This helps protect personal data and maintain anonymity of users.
• Protection against blockchain analysis. Blockchain analysis tools can be used for tracing transactions and identifying connections between addresses. Crypto mixers make this analysis more difficult by increasing the level of privacy.

2. Protection against cybercriminals

• Concealing financial activity. Using crypto mixers helps users to conceal their financial operations. This reduces the risk of becoming a target for cybercriminals who may attempt to hack their wallet or do other types of fraud.
• Anonymity of transactions. With the increased privacy of transactions, attackers have more difficulties identifying and tracing holders of crypto wallets.

3. Protection of trade secrets

• Secrecy of business operations. Companies can use crypto mixers to conceal their financial transactions and maintain trade secrets. This is particularly important for protecting against competitors and preventing leaks of data about your business partners and transactions.
• Avoiding price discrimination. By concealing amounts and payees, companies can avoid situations where suppliers or customers try to change the terms of business on the basis of financial data.

4. Bypassing censorship and restrictions

• Freedom of transactions. Crypto mixers can help users to bypass government restrictions and financial sanctions, allowing for transactions without the involvement of third parties. 
• Access to global markets. Users from countries with restrictions on the use of cryptocurrency can use crypto mixers to get access to global markets and financial services.

1. Legal risk

• Illegal business. Many governments see the use of crypto mixers as an attempt of money laundering or concealing illegal operations. This may lead to serious legal implications for users.
• Prohibition and regulation. In some countries, crypto mixers are prohibited or strictly regulated. For example, the U.S. Treasury Department has sanctioned some crypto mixers (with Tornado Cash being the most prominent example).

2. Security risk

• Fraud. Centralized mixers require trust in an operator. It happened that mixer operators embezzled users’ funds or kept record of transactions.
• Hacks and data breaches. Mixers can be hacked, leading to the leakage of transaction data and loss of user funds.

3. Technical risk

• Errors or bugs in smart contracts. Decentralized smart contract-based mixers may have errors, bugs or vulnerabilities that could be utilized by attackers to steal money.
• Insufficient anonymity. Despite being mixed, cryptocurrency transactions can still be tracked by advanced blockchain analysis methods.

4. Risk of illegal business. Even with the best Bitcoin mixers, user’s cryptocurrencies may be associated with illegal business. And this can adversely affect the reputation and complicate the use of these funds on legal platforms. In particular, crediting an account with funds after they have been mixed by a crypto mixer may well provide grounds for blocking it. If you fail to get your account unblocked on your own, you can always contact SEVEN SENSES and we will help you regain access to your funds with our Unblocking an Account on Centralized Platforms service.

Now that we have learned what a crypto mixer is and how it works, it becomes obvious that this method for enhancing the anonymity of transactions is tricky and involves significant risks. Legal implications, security threats, and technical vulnerabilities make using mixers dangerous and potentially illegal. Therefore, before resorting to using a crypto mixer, it is essential to thoroughly weigh up all the risks and consider alternative ways for providing privacy of your cryptocurrency transactions. And if you still encounter any problem, you are advised to contact our experts.