Bitcoin was originally conceived as an anonymous payment system. It is estimated there are currently 17.3 million Bitcoins in circulation. The purpose of this article is to cover off some of the features which help Bitcoin to become so anonymous. For some of you reading you may have heard about Bitcoin but are not sure where to start if you want to ensure your BTC holdings are truly anonymous from nosy people online.
How does Bitcoin mixing work?
Bitcoin mixers are often considered a form of Bitcoin laundering tool, though there’s more to the story. Before Bitcoin, money was exchanged in the traditional way, i.e. the sender had a wallet with real money and the receiver would have their own wallet with real money. This is reasonably simple, both people have access to their money and the money only moves one way.
With Bitcoin things become a little more complicated. The BTC network is constantly sharing and verifying transactions. The Bitcoin network is essentially a network of computers around the world. When a user sends a message on the network it is bundled up (encrypted) and then sent through one of the computers in the network. When the message passes through each computer on the network, the network sends out a unique cryptographic message each time which confirms the send.
In a traditional wallet, the user would have complete control over their wallet. They would be able to store it anywhere. This means for example that even though you do not trust someone else with your money, they could store it in their digital wallet in a cloud server. You do not have to worry about them having physical access to your money, they can hold it in cyber space with no physical connection.
The bitcoin network works in a similar manner. Once a transaction is sent it is bundled up and sent through the network. Each user has their own wallet which contains their money. When they receive a Bitcoin transaction in one of their wallets, the wallet sends a cryptographic message through the network to confirm the receipt of Bitcoin. This message is bundled with other transactions and sent through the same computer nodes which sends the message to confirm the initial send.
Therefore, the same information is being sent out over a series of computers. The more people that send it, the greater the chance that someone can see the transaction and the amounts sent between wallets. To counter this, a user can send a transaction to another user through a mixing service.
The Bitcoin mixer service is designed to make transactions completed on the Bitcoin network less transparent. They will attempt to change the address the message was sent from and pass it through as a number of random nodes. The Bitcoin network will now confirm that the tx was sent from one of the random nodes and not the original sending address.
How does this confuse the Bitcoin network?
Each node in the network has a list of all users who have been verified by the network. When a user sends out a message, the node will take note of the unique addresses of the sending user and receiver. If you message goes out the same node every time then the node will have a list of all registered users in the network which go back to when you signed up.
However, if you message is passed around each node in the network, each node keeps the list of users it has seen. This means that the original sending address will be registered with each different node. The confusion is created by the network not knowing which sending address belongs to whom.
Therefore, when a node receives the message it sends a cryptographic message through the network that confirms both the message and the sending address belong to the sender. The node then sends back another message confirming the message and the receiver.
This gets passed back through the network again. Each time it is sent out, the sending address is registered with a number of different nodes. With enough nodes seeing the message, the network will become confused. It is not able to confirm who the message and receiver belong to. Therefore, the message and the address are not registered in the system. Therefore, the send cannot be linked back to the original sending address.
This confuses the network. The original sending address will not be recognized by any of the nodes and the Bitcoin network will accept that message as legitimate.
Also, the original sending address will not be verified as being part of the Bitcoin network. Each node will have a list of all registered users which go back to when you signed up.