cFrom tracked payer IP addresses and post-payment analysis to viruses and spyware, a lot of methods have already been devised to remove privacy from blockchain transactions. If anonymity is lost, recovering it becomes a difficult and costly process.
The traditional banking system offers good privacy by default. For example, your distant relatives can’t reliably know if you can ask to borrow money, your employer doesn’t know for sure where you spend your annual bonus, and scammers don’t monitor your list of recent purchases to designate you as their next victim.
Every time another wallet loses its privacy due to one of the above reasons, any researcher can “rewind” all transactions on that wallet and further down the chain reveal the owners of previous addresses. This blockchain feature poses a systemic risk to the entire network. After all, if a large enough number of addresses are already known, it will be possible to divide all coins into “clean” and “dirty” (implicated in suspicious transactions). This is a threat to the whole concept of cryptocurrency decentralization.
How to solve this problem?
CoinJoin is a mix-and-match technology for anonymizing bitcoin transactions proposed by developer Gregory Maxwell in 2013.
With CoinJoin, multiple users group their transactions into one. The outputs of the common transaction are mixed, making it impossible to trace to whom and from whom each particular payment went.
The advantage of this idea over dozens of alternatives is that it doesn’t require any modifications to the Bitcoin protocol. The network already operates according to the rules, where a single transaction can have multiple signatories and multiple delivery addresses.
The idea is this: if subscriber A needs to pay to wallet B, subscriber C to wallet D, and subscriber E to wallet F, then they create a common transaction, where A,C,E are seen as inputs, and wallets B,D,F are seen as outputs. And there is no way to tell whose payment was intended for whom.
If you want to see how it looks like on the blockchain, here is an example of a CoinJoin transaction with two participants.
What does CoinJoin do?
Besides the obvious instant additional anonymization, CJ also gives a long-lasting effect – for any researcher looking for some reason to “thread” to a wallet of interest, such a double or triple transaction actually means a dead end. This scheme also works well for payments for online casinos if you want to hide your transaction. Read Tips on Playing Bitcoin Roulette.
But that’s not all. CoinJoin method has a collective “immunity” effect for the whole system: even if not all (but many) users start using this method, it becomes a kind of protection for the rest. If a significant amount of BTC will pass through such transactions at least once – attempts to create “white” and “black” lists will lose all meaning.
Some cryptocurrency exchanges want to stop accepting BTCs via CJs. In response, many prominent figures from the industry began to urge users, on the contrary, to increase interchanging to the maximum in order to show that decentralization and anonymity are the basic principles of blockchain technology.This scheme also works well for payments for online casinos if you want to hide your transaction. Read Tips on Playing Bitcoin Roulette.
Some cryptocurrency wallets are already coming out with CoinJoin support (e.g., WasabiWallet), but it has to be said that shuffling is not yet widespread. On Bitcoin’s tenth birthday, the largest anonymous commingling transaction of 34 BTC BTC (about $240,000 at the time). Also there is the news that facebook may launch its own cryptocurrency in 2021.