3 Crypto Privacy Tools: Comparing Privacy Coins & Coin Mixers

crypto privacy tools

There are two main types of technologies in the crypto space that can help us to maintain our on-chain privacy. These are privacy coins and coin mixers. What are the similarities and differences?

Let’s approach the crypto privacy tools question from the starting point of Zooko Wilcox, co-founder of privacy coin Zcash: ‘Privacy isn’t a thing you can add [to applications]. It’s not a feature like a new button or dark mode. You can add features, but you can’t really add privacy.’

From this angle, mining coins makes renewed sense. To mine a coin means starting out in a ‘virgin’ state. Compare it to literally searching for gold, as some hobby ‘prospectors’ still do. You haven’t interacted with other coin holders. There is no trail, no weak link for others to pry in, as no one has transacted with you. Your coins are earned with your own toil, springing from the earth if you will. Privacy coins like Monero allow you to start with a blank slate in this way (fellow privacy coin Zcash is expected to switch to proof-of-stake).

But let’s be realistic, most of us won’t want to mine from home, having to deal with the hardware, and VPN’s and firewalls setups needed for privacy. Alternatively, unless you’re a no coiner without any prior history of crypto purchases, you’ve already left a trail, having supplied ID’s and address statements to 1 crypto exchange. What to do? As mentioned, there are two main types of tools you could use to create some level of privacy for yourself.

1. Privacy Coins

The first implementation of privacy on the blockchain came in the form of Bitcoin-derived chains with added privacy features. One of the first of which was Zcash. Zcash is based on the bitcoin protocol, with the important addition of privacy-preserving transaction data using zero-knowledge proofs. Zk-rollups are used to restrict third-party access to recipient and sender information.

The original and still most widely used privacy coin these days is Monero, introduced in 2014. By using Monero and Zcash, users can send and receive completely private payments. 

crypto privacy

But how to even use these coins, considering that many merchants don’t accept them? Well, through an atomic swap, you could convert some or your Bitcoin to a wallet with Monero or Zcash (so without relying on a third party and thus preserving privacy). In doing so, you could operate your online spending behavior in a totally private way, not traceable to your Bitcoin stash.

2. Privacy on the Application Level: Coin Mixers/Tumblers

If the crypto currency of your choice doesn’t have privacy ingrained in its design – like most don’t – you’ll have to take your coins to the laundromat, so to speak. It is the difference between on-chain privacy by default (blockchains like Monero) and privacy as a service: the coin mixer. Coin mixers are also known as tumblers.

In the early days of coin mixing services, users who wanted privacy for their BTC, might send their coins to a third-party platform, like Helix or Coin Ninja. The founder of these platforms was prosecuted, and it’s notable that this was the first case in which the U.S. Department of Justice explicitly called bitcoin mixing a crime. Being wary of companies anyway, it’s no surprise that peer-to-peer solutions sprang up to achieve privacy. CoinJoin was an early peer-to-peer privacy solution for Bitcoin. 

How do coin mixers work? First a word of warning. Even though the following illustration involves a crime scene – whereas most activity in privacy tools comes from normal, everyday use – it will help to explain the process super vividly – but that doesn’t mean we compare the act of coin mixing to criminal acts in a moral sense.

Imagine a perpetrator of a crime who fears he has left some DNA on the crime scene. What he could do is vacuum the carpet of a crowded hotel lobby and empty the particles he has collected over the crime scene. The DNA of countless persons will join his own. Good luck connecting him to the crime scene after this procedure.

Again, apologies for the crime scene comparison, as we’re not talking about crime here. A CoinJoin is by origin a voluntary agreement of multiple users who want to stay private. A user that wants to implement CoinJoin will need another user who also wants to mix coins, and together they initiate a joint transaction. An onlooker wouldn’t be able to determine who sent bitcoins to whom.

In the early days, coinjoining was a lot of hassle. That is why developers created tools that automate the process. Hot wallets like Wasabi were set up and made it easier to join coins – even though they have been challenged in terms of the level of security and true anonymity they provide. According to Trezor and Wasabi, they will partner up for a form of Coinjoin implementation for hardware wallets in the near future. 

The Most Popular Coin Mixer: Tornado Cash

The most popular coin mixing platform on Ethereum, Tornado Cash, is built as an application. The platform uses smart contracts and zk-proofs to sever links between the source and destination addresses.

privacy tools

WARNING!!!!

Don’t interact with Tornado Cash. In the summer of 2022, The U.S. Treasury’s Office of Foreign Assets Control (OFAC) added Tornado Cash and smart contract wallet addresses to the sanctions list. Tornado Cash allegedly made it possible to launder proceeds from cryptocurrency hacks by the Lazarus Group from North Korea.

To use a mixer like Tornado Cash, users must first connect a Web3 wallet such as MetaMask. They then deposit funds into a smart contract created by the service provider that mingles their funds with those of the other users in order to obfuscate the origins. Users can then withdraw those funds from the mixed pool into a newly created wallet with no on-chain connection to the initial depositing address.

Tornado Cash isn’t just for Ethereum: it is also available on Binance Smart Chain, Polygon, Gnosis, Avalanche, Optimism, and Arbitrum. But the original parent chain, Ethereum, is where the vast majority of total value locked resides.

Currently, users can only deposit and withdraw fixed amounts of for example Ether. Ether users can deposit 0.1, 1, 10, or 100 ETH in a single transaction. The user gets a sort of coupon, a zk-snark generated key called a private note. This is the IOU for the same amount as was deposited. This amount can be withdrawn to any address (where the sanctions come in, is that this final transaction is public. They can’t connect the dots that you were the person who deposited and then withdraw that 1 Ether to a different address. But they can sanction that withdrawal address)

Practical Differences Between Privacy Coins and Mixers

Coin mixing tools give you a bit more flexibility than privacy coins, but mixing comes with an extra attack vector. Tornado Cash relies on a large enough user base to be able to mix with reliability. It’s as if the number of users equals the amount of clean water or soap in a laundromat. The comparison is more apt than one might think: the longer you keep your coins in a mixer like Tornado Cash, the ‘cleaner’ (less traceable) the coins get. Same with the amount you want to mix: the higher the amount, the more liquidity problems for that mixer. 

To sum up, coin mixing tools can be used in more or less correct and thus safer  or less safe ways. This creates a risk for users who don’t know what they’re doing. 

Privacy coins, especially Monero, don’t carry a similar risk. Privacy is the default feature there (Zcash is also moving toward this default privacy setting, whereas it used to be optional, posing an attack vector of a large pool of non-private addresses).

3. Programmable Privacy on Layer 2: Nascent Tech

As a sort of bonus, let’s briefly look at a tool like Aztec. It is the first application of private Ethereum DeFi: a smart contract platform built on Ethereum with default privacy for all transactions. Aztec expands the realm of possible private acts in the cryptoverse. Users can stake and earn yield on their assets in a shielded way. Also, shielded wrapping is in the cards. Aztec grabs the opportunity that rollups create to use privacy tech on Layer 2.

Conclusion

Both privacy coins and mixers are sound privacy tools and effective when executed correctly. The main issue is not the tech, but the looming threat of future sanctions. The sanctioning of Tornado Cash might be overturned in court but that might take a while. In the meantime, it remains to be seen if privacy coins too will be sanctioned, which would create a much higher threshold to use them.

On the other hand, institutional interest to use privacy tech would pull at regulators from the other direction. There are reasons to believe institutions would welcome privacy tech. Like individuals, financial institutions don’t want transparency of transaction histories.

3 Crypto Privacy Tools: Comparing Privacy Coins & Coin Mixers - - 2022

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3 Crypto Privacy Tools: Comparing Privacy Coins & Coin Mixers - - 2022
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