A closer look at CoinJoin – Cryptopolitan

Bitcoin transactions are not completely anonymous. The identity of the sender and receiver of a Bitcoin transaction can be decrypted, and all transactions in the chain can be traced, making it easier for dedicated agents like Chainalysis to map transactions and crack the identities of transactors. Bitcoin privacy tools like CoinJoin, on the other hand, are gaining ground as more people seek to protect their identities on the network. In this article, we take a closer look at CoinJoin, its workings, limitations and adoption.

What is CoinJoin and how does it work?

CoinJoin is a technique that ensures transactions cannot be traced and protects the privacy of Bitcoin users. The solution was first proposed by Greg Maxwell in 2013 and has since been developed by various Bitcoin wallet creators, including the Wasabi wallet. CoinJoin works by mixing different Bitcoin transactions as inputs and confirming them on-chain as a single CoinJoin. Afterwards, the single transaction is distributed to recipients, making it more difficult for agents monitoring transactions to distinguish them, thereby protecting users’ identities.

In the recent CoinJoin performed on April 20, 351 inputs were used to merge 209.70283337 BTC, which was confirmed on-chain before being redistributed through 336 outputs. CoinJoin allowed over $6 million in value to be moved privately on the Bitcoin network, protecting the identity of senders and receivers. The transaction demonstrates the effectiveness of CoinJoin in ensuring privacy on the network, especially when the number of inputs used is high.

Limitations on CoinJoin and Adoption

Despite the effectiveness of CoinJoin in ensuring privacy on the Bitcoin network, there are limitations to its adoption. One such limitation is the internal limitations of the Bitcoin network, which can limit the size of CoinJoin, such as block size and coordination of the number of people who will send transactions in a single block simultaneously.

Another limitation is that CoinJoin does not block flagged Bitcoin transactions, which ensures that the tool is not used by hackers looking to launder stolen assets. As a result, there is still a risk that some transactions may be flagged as fraudulent, making it difficult for users to use the tool.

Despite these limitations, CoinJoin is a popular technique among Bitcoin users who want to protect their identity on the network. The recent integration of CoinJoin on Trezor Model T, a hardware wallet provider, is a testament to the growing popularity of the tool. However, users who choose CoinJoin will have to pay a 0.3% coordination fee and wait a bit longer for the transaction to be confirmed.

Comparison with Tornado Cash

Tornado Cash works by pooling funds from multiple users into a smart contract, which then distributes the funds to users, making it difficult for anyone to trace the source of the funds. The funds are also converted into an anonymous ERC-20 token, further masking their origin.

Compared to CoinJoin, Tornado Cash offers a higher level of privacy since it completely breaks the link between the sender and receiver of the funds. However, Tornado Cash is only available for ERC-20 tokens and not for Bitcoin, limiting its adoption among Bitcoin users seeking privacy on the network.

Furthermore, Tornado Cash has been associated with criminal activities, particularly money laundering, which has prompted regulators to closely scrutinize the tool. For example, the US Financial Crimes Enforcement Network (FinCEN) proposed a new rule in 2020 that would require crypto exchanges to collect and store personal information about anyone using Tornado Cash. Although the proposal has not been finalized, it highlights the regulatory risks associated with using privacy tools such as Tornado Cash.

Conclusion

Bitcoin’s privacy tool, CoinJoin, is gaining ground as more people seek to protect their identities on the network. The recent CoinJoin performed on April 20, which merged 209.70283337 BTC, is a proof of the effectiveness of the tool in ensuring privacy on the network. However, CoinJoin has its limitations, including the inability to block flagged Bitcoin transactions, which makes it difficult for some users to use the tool.