Privacy is a crucial concern for users of cryptocurrencies. While transactions on the blockchain are secure and immutable, they are also completely transparent, meaning that anyone can see the details of a transaction, including the sender, receiver, and amount transferred. This lack of privacy has led to the development of various privacy tools that aim to provide users with more anonymity and security. These tools allow users to shield their transactions and personal information from third parties, making it more difficult to trace the origin or destination of funds. Users can keep their transactions private while still being able to access the full range of features offered by cryptocurrency. With these tools, cryptocurrency users can easily safeguard their financial information, maintain anonymity while trading, and avoid potential surveillance and censorship.
Crypto mixers or tumblers gather and merge the cryptocurrencies deposited by multiple users, then perform a pseudo-random shuffling of the funds. Subsequently, users transfer the mixed funds to new addresses they control, with a minor service charge applied. Many mixers allow users to schedule their withdrawals randomly and withdraw randomized amounts at irregular intervals to increase the difficulty of tracking the deposited funds. In contrast, some mixers attempt to obscure their use by altering the transaction fee and the type of withdrawal address used.
Centralized custodial mixers have a single operator, and they temporarily have control of the users’ funds. These mixers have privacy risks because of their centralized and custodial nature. CoinJoins and smart contract mixers are non-custodial. CoinJoin is usually native to some privacy wallets that combine a user’s coins with several other users in a transaction. Smart contract mixers do not combine users’ funds. Users who send their digital assets to the mixer receive a cryptographic note that proves they are the depositors and send a note to the mixer to withdraw the amount to a new address anytime they want. The coins are tumbled in different ways until users are ready to withdraw. BitCloak, UniJoin, and Yo!mix Mixer are some coin mixer platforms.
Mixers are not inherently illegal but they are often used for illegal activities. FinCEN (Financial Crimes Enforcement Network) in the US has shut down mixers associated with hacks, money laundering, and cybercrime. FinCEN now requires mixing services to register as money transmitters under the BSA (Bank Secrecy Act).
Zero-knowledge proofs (ZKPs)
ZKPs are a cryptographic technique that allows one party, the "prover," to demonstrate to another party, the "verifier," that they know a particular piece of information or have access to a certain resource without revealing any additional information. It allows a party to prove they have know something without actually revealing what that knowledge is. For example, imagine you want to prove to a website that you are over 18 years old, but you do not want to reveal your exact age or birthdate. A zero-knowledge proof could be used to verify that you are over 18 without revealing any additional information about your age or birthdate. ZKPs verify transactions on a blockchain without revealing the identities of the parties involved or the amount being transferred. This helps to maintain privacy and anonymity on the blockchain and provides a way to authenticate and authorize actions while maintaining privacy and security. Privacy coin Zcash and the Validium and Volitions projects use ZPK.
Crypto owners have crypto wallets as secure storage of their digital assets. Wallets do not actually keep the coins. Instead, they store the private and public keys that enable users to control their funds. Privacy wallets use security features, such as encryption and IP address anonymization, while facilitating coin mixing. Like crypto mixers, users’ coins are mixed anonymously and disguise transactions. They give financial privacy to users, but criminals can use them to launder their stolen funds. Mercury Wallet, Guarda, and Wasabi Wallet are examples of privacy wallets. XMRWallet is a secure wallet for the privacy coin Monero, but it does not offer tumbling services. The use of Monero guarantees that all transactions are private, regardless of what XMR wallet you are using.
Part 2 of this article will discuss other privacy tools that will help users protect their privacy.