In the second part of this series, I’ll focus on financial privacy, including “mixers” and ring signatures. Each of these topics could warrant their own full post, so I’ll stick to the high-level capabilities of each rather than diving too deep.
If you’re looking for privacy in cryptocurrency today, there are a few practical options, including mixing services, often called “mixers” or “tumblers”, and privacy-centric cryptocurrencies, like Monero and Zcash. Let’s discuss mixers and Monero, and save Zcash for a more detailed post on zero-knowledge proofs.Mixers
The basic idea behind a mixing service is nearly as old as finance itself.
A group of people want to keep their financial transactions private from some observer. To do that, they combine their funds into one pool, keeping track of who is owed what on a private ledger. Think “a second set of books”. When those mixed funds are spent, the origin of a each payment is obscured — observers see the amount paid and the recipient, but don’t know which person or persons in the group authorized the payment.
Now, there are clearly some issues with a scheme like this. Who keeps the ledger? Who can be trusted with the pooled funds?
Let’s take a closer look at how Bitcoin users have dealt with these issues.Centralized services
BitMixer was a popular mixing service. Launched in 2014, it was a fairly literal implementation of the above scheme.
Users would deposit funds directly with the service. BitMixer then broke deposits into smaller pieces, mixing them with other users’ funds, as well as BitMixer’s own reserves. Users could then withdraw “new” outputs, unconnected on the blockchain to their original deposits. In the middle, of course, BitMixer took a significant fee.
So, who held the funds, and who kept the ledger? Both were controlled by the same centralized party — a disaster waiting to happen. Exit scams are common in Bitcoin, with a rich history of e...