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Bitcoin’s Onchain Privacy Methods Gain Traction: A Closer Look at CoinJoin

TL;DR

  • CoinJoin is a privacy tool that ensures Bitcoin transactions cannot be tracked, protecting the identities of the sender and receiver. 
  • CoinJoin offers a lower level of privacy compared to Tornado Cash but is available for Bitcoin, making it a popular choice among Bitcoin users seeking privacy on the network.

Bitcoin transactions are not completely anonymous. The identity of the sender and receiver of a Bitcoin transaction can be decrypted, and all on-chain transactions can be tracked, making it easier for dedicated agents like Chainalysis to map transactions and crack the identities of transactors. Bitcoin privacy tools like CoinJoin, however, are gaining traction 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 tracked, protecting the privacy of Bitcoin users. The solution was first proposed by Greg Maxwell in 2013, and it has since been developed by various creators of Bitcoin wallets, including the Wasabi wallet. CoinJoin works by jumbling different Bitcoin transactions as inputs and confirming them on-chain as a single CoinJoin. Afterward, the single transaction is distributed to receivers, making it harder for agents monitoring transactions to differentiate them, and thus, protecting users’ identities.

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

Limitations of CoinJoin and Adoption

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

Another limitation is that CoinJoin does not block flagged Bitcoin transactions, ensuring that the tool is not used by hackers wishing 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 seeking to protect their identities 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 opt for CoinJoin must pay a 0.3% coordination fee and wait slightly longer before the transaction is confirmed.

Comparison with Tornado Cash

Tornado Cash works by pooling funds from multiple users into a smart contract, which then redistributes the funds to the 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 severs the link between the sender and receiver of the funds. However, Tornado Cash is only available for ERC-20 tokens and not for Bitcoin, which limits 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 scrutinize the tool closely. For instance, the US Financial Crimes Enforcement Network (FinCEN) proposed a new rule in 2020 that would require crypto exchanges to collect and store personal information on anyone using Tornado Cash. While the proposal has not been finalized, it highlights the regulatory risks associated with using privacy tools like Tornado Cash.

Conclusion

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

Disclaimer. The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decision.

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Haseeb Shaheen

As a Web Researcher and Internet Marketer, Haseeb Shaheen delivers relevant valuable content for audiences. He focuses on financial and crypto market analysis, as well as technology-related areas that help people change their lives.

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