How do mixing services work, do they put dozens of inputs and outputs into each transaction in order to circulate the funds while incurring minimal transaction fees?
Yes Pablo, what you’re describing there is called “a coin join” which was invented by (I think a couple of people but most prominently) Greg Maxwell who is one of the Bitcoin core developers back in 2012 or 2013.
A coin join transaction is one where over several rounds with several transactions the inputs and outputs are shuffled and joined from several different participants, where each participant partially signs their input and their outputs in such a way that the transaction can proceed in a way that they don’t have to trust the other participants. And by mixing inputs and outputs across several rounds of transactions perhaps four, six, eight or ten transactions these types of services which do coin join offer the ability for people to reduce their…reduce the ability of analytics companies and snoops and other privacy violations. Than they’re not foolproof.
And, so, Pablo also asks: “Are there any mixing services that can really make funds anonymous given the growth of analytical tools?” And the answer, Pablo, is really “no”.
The reason for that is because, well, these services can obfuscate transactions for the purposes of just relative privacy given sufficient analysis and also these analytical companies have access to information from exchanges that identifies addresses and associates it with specific people. The combination of having a broad picture from multiple exchanges and merchant services that are feeding them data and the ability to do statistical analysis means that most of that anonymity can be stripped away by analytical tools. Part of the reason for that is that while addresses can be made stealth and the identity link made weak in a coin joint transaction the one thing you can’t hide is the value and you can do statistical correlation analysis on the inputs and outputs to associate the values as they’re going through. So, the values are shown clearly within a transaction.
The solution to that also comes from Greg Maxwell, who has proposed and implemented a prototype of the system called “confidential transactions” which is a system that encrypts the amount in a transaction but still allows everyone to verify that the amounts add up without knowing what they are. Confidential transactions is something that has been part of the elements project at block stream and it’s developed quite a bit as part of confidential transactions. Greg Maxwell invented some new cryptography, including “range proofs”, which then became more and more efficient and the latest version of range proofs is called “bulletproof” which is a very very efficient mechanism for proving that the values add up even though they’re encrypted within a confidential transaction. Now confidential transactions encrypt the value but that doesn’t mean they’re used on their own they would be used in conjunction with something like coin join to mix up the addresses.
And so, you have, if you have both address anonymousationand the encryption of the amount then analytical tools will have a very difficult time tracking transactions.
Final question from Pavel Olin, the same theme: “Is it cheaper and more effective to anonymize funds by exchanging them into more narrow and back?” Possibly, there are some significant risks in doing that in terms of privacy and anonymity.
One of them is that most of the timeexchanging funds, at least through athird party, such as: an exchange orshape-shift, will produce a trail becausethose companies for many differentreasons have to collect some information and that information may be captured, let’s say, by various parties. What’s more interesting is the possibility of doing atomic on blockchain swaps between different cryptocurrencies as a means of increasing anonymity and privacy including atomic cross chain swaps through payment channels on Lightning Network. So, that may have a significant impact on privacy and anonymity in the near future, but these are still pretty early days when it comes to privacy and as I’ve said I think this is one of the weaknesses of almost all cryptocurrencies.
Vikaus asks: “Can coin join and TOR be used to offer a level of privacy on the Bitcoin network, which wallet currently offers these services, does coin join require you to trust the third party for the transaction?” Vikaus, yes, coin join and TOR are tools that are often used to increase the privacy that you get on the Bitcoin network. I know at least one wallet that offers both: coin join services, they call them “Ricochet”, but it’s basically the same type of coin mixing and redirection and also offers TOR networking and that’s “samurai wallet”. I believe you can also configure other wallets like “Mycelium”, I believe “breadwallet” and a few others. You can configure them to use TOR transport.
And finally, for your last question: “does coin join require you to trust a third party for the transaction” – no it doesn’t it’s a trustlessmulti-party signature of protocol