Ask the man in the street about Bitcoin and he might respond, “Isn’t that for criminals?”. This common misunderstanding persists despite Bitcoin’s open ledger, where on-chain transactions are for all to see.
Although Bitcoin transactions are private, maintaining anonymity is increasingly difficult. A Bitcoin wallet address, pseudonymous by nature, can be linked to personal information with increasing ease. The transaction history of a particular amount of bitcoin is traceable between various identifiable individuals. Most retail investors acquire Bitcoin from exchanges, legally required to collect KYC, (Know Your Customer), details. This centralization of identifying personal information can be provided to authorities upon request, or indeed, hacked. Who gains access to this data in the future remains an open question. Companies offering chain-analysis services can trace the unique transaction histories of various coins and wallets. Even amateur enthusiasts with patience and some technical knowledge can follow transactions to reveal the individual behind a wallet address.
Although there is no identification on Bitcoin per se, the true identity data will be outside of the blockchain. Once you remember the entire blockchain, with all its component transactions, remains completely open and will never disappear, the importance of privacy tools becomes clear. Would you really like the world to know who you transacted with, donated to, received from, and how much your wallet held, now, or twenty years from now, forever?
Coinjoin is one of the most popular tools developed to maintain privacy on a digital open ledger. It is a peer-to-peer protocol that if used correctly, can obfuscate the individuals behind transaction data. Coinjoin requires several users to join their transactions together to create a common transaction. Multiple individuals sign a transaction on an agreed amount of Bitcoin. The separate UTXO’s, (unspent transaction outputs), of which Bitcoin is comprised, are “mixed” by the coinjoin protocol and an equal amount that was inputted will be returned to each wallet. This obfuscation of the component UTXO’s makes tracing their origin more difficult.
So what are the advantages and why would one consider using Coinjoin? Here BitcoinNews.com present 8 reasons why you should consider using Coinjoin for Bitcoin transactions.
Big Brother is watching you
Governmental legislation has recently increased and will continue to do so. Exchanges are subject to many of the same licensing regulations of traditional banks, with compulsory KYC and AML (anti-money laundering) requirements. The centralized collection of this data is a privacy challenge to any individual seeking self-sovereignty. While regulation is needed especially in such a new market, government overstep is always a possibility. Once privacy has been given over it can be difficult to retrace. Financial privacy empowers the individual and by extension society. A truly sound money that is not centrally manipulated has always contributed to societal thriving. Not your keys, not your coins is a familiar mantra since the earliest days of Bitcoin. Increasingly, maintaining privacy over your financial health and history, as well as your private keys, can provide protection through shifting political upheavals.
Should I show my bank balance when buying coffee?
Coinjoin allows you to spend Bitcoin without the recipient having a record of where the payment has come from. Why would this be an advantage? Imagine I hold 5 bitcoins in a wallet. I then send 0.05 btc to an individual from this wallet. After the transaction, the recipient could examine the bitcoin chain and see that the sender’s wallet holds 5 bitcoins. However, using coinjoin in this instance would reveal the sender’s address holding a much smaller amount. The history of the UTXO’s making up the 0.05 btc would also be hidden. Spending anonymity allows bitcoin to maintain the transaction privacy we already experience daily. If I buy a coffee at Starbucks, I do not expect to reveal my bank balance or transaction history to the vendor. Privacy is mutual, protecting the sender and receiver.
Non-custodial, or not your keys not your crypto
Coinjoin does not require users to give up custody of their funds. There is no requirement to trust a third-party. By eliminating counter-party risk in a centralized party, coinjoin is an attractive option for users who do not feel technically proficient. Privacy is not only for geeks and the more individuals using coinjoin, the greater the privacy afforded to wallets and transactions. Recent events involving companies who offer custodial services show the importance of non-custodial trustless models. Celsius, a centralized custodial lending platform recently froze all client withdrawals and declared bankruptcy. As if not bad enough related court proceedings placed all account holders and their names in the public domain. Privacy will be increasingly threatened as we move forward into an digitized world.
Tainted Coins and future proofing
Privacy is important today. It is also important in an unknowable future. Circumstances change, governments come and go and regulations are tightened. Centralized authorities may try to curb Bitcoin’s independence by sanctioning certain coins linked to individuals or groups that may be deemed undesirable at some point in the future. Who knows, maybe that wallet you received sats from three years ago is now problematic, and tainting you by extension. Fungibility is an important part of any medium of exchange and is one attribute that Bitcoin struggles to achieve independently. Simple conjoin transactions help retore fungibility and in doing so strengthens Bitcoin’s privacy.
Not reinventing the wheel, Coinjoin as a protocol
Because Coinjoin is a trustless protocol for mixing UTXOs from multiple owners, it can fit into the existing architecture without requiring any substantial changes to Bitcoin’s code. This spirit of aligning with the exiting code becomes more important as Bitcoin ossifies and improvement protocols become harder to implement. Indeed as privacy focused wallets grow and evolve, they will do so in a necessary framework that ensures adherence to open-source trustless principles.
Open to everybody
Decentralized privacy tools should be for everyone. In response, many easy to use coinjoin implementations have released to help with what might seem technically intimidating. Open-source desktop wallets such as Wasabi have easy to use interfaces and are crucially non-custodial; users retain their private keys ensuring they remain self-sovereign. The array of new wallets fit into Bitcoins architecture by being open-source and trustless by design. As well as coinjoin they utilize TOR and block-filtering to further anonymize parties to transactions. The market for these type of wallets is growing in response to customer demand and will include more feature-heavy versions such as the Mycellium wallet. The common thread is the emphasis on security and trustless design to maximise privacy.
Wallet anonymity and human rights
By breaking the link between an individual and a pseudonymous wallet address, coinjoin is a technology that contributes to human flourishing and dignity. It empowers a person to decide how and when, if at all, their personal information is passed to others. This privacy gives a context for an individual to develop their true natures. And once this privacy is secured, it is the foundation of other human rights such as freedom of expression, thought, assembly and worship. These rights form the bedrock of democratic societies.
Decentralized versus Centralized
As a decentralized protocol that does not require tweaking of the Bitcoin core, coinjoining can avoid the inherent risks of centralized mixers. In these cases there are no guarantees that the total amount of Bitcoin inputted will be returned. Also that the returned coins will not be tainted somehow. Centralized services can be shut down by governments as was seen recently with the Whirlpool mixer. In this case not only was the site shut down and developers jailed, but wallets who have used the mixing site in the past have been effectively blacklisted. A decentralized coinjoin transaction creates enough plausible deniability to prevent an individual being linked to a transaction with any certainty.
In summary, CoinJoin cannot guarantee anonymity. But it can improve it on a level not seen in Bitcoin without this protocol. And in a trustless open-source environment it can empower the individual to strive for a better future. As our lives become increasingly digitized, privacy will become more scarce. These tools will allow that man on the street to take control of his personal information as technology encroaches on every aspect of our lives.