Know & go
An inside look – Ever done the bitcoin shuffle?: This week, we’re spotlighting Bitcoin mixing techniques that help conceal some transaction details and add an extra layer of anonymity to Bitcoin.
Three things to know: (1) Dharma launched a beta version of its latest peer-to-peer lending platform that is connected to Compound (2) Algo Capital raised $200 million to invest in companies building on the Algorand network (3) Blockchain partnered with BitPay to enable users to pay for products and services with their crypto holdings.
Market snapshot: Total crypto market capitalization is around $236.0 billion (-8.7% w/w) at press time. BTC is trading at $9598 (-6.6% w/w), ETH is at $169 (-12.2% w/w). BVOL (the rolling 30-day annualized Bitcoin volatility as calculated by BitMEX) is 64.1%, up from 62.0% last week. (8/30 12:00PM ET)
An inside look: Ever done the Bitcoin shuffle?
Transparency is at the heart of crypto and blockchain technologies, but today we’re going to spotlight Bitcoin mixing techniques that conceal some transaction details at the protocol level to help add an extra layer of anonymity for crypto natives.
All Bitcoin transactions are, by design, made publicly available so its network of nodes (or more simply, computers running Bitcoin’s software) can validate that each sender owns the specified amount of bitcoin being exchanged. Bitcoin users must therefore be comfortable with sharing their accumulated wealth and transaction history. While there is a cloak of pseudo-anonymity (users are identified by alphanumeric addresses), any Bitcoin wallet or exchange service that collects personal information can tie bitcoin owners and their previous transaction information. Moreover, chain analysis firms like Chainalysis and Elliptic expedite the process of linking identity to bitcoin holdings as well as transaction outputs to alleged illicit activity, enabling bitcoin services to blacklist specific coins or addresses. However, some argue that these actions infringe upon user privacy and arguably the principle of fungibility (or the idea that all coins are created equal and essentially interchangeable just as one dollar bill equals another dollar bill regardless of one bill’s past activity).
One key solution to preserving financial privacy and token fungibility, in spite of Bitcoin’s public nature, are mixing (or tumbling) services. Mixing is often provided by a third party service that pools and shuffles user funds (typically via off-chain methods), then sends bitcoin back to each participant that is equal in input value but from an unknown source. In short, mixing obscures the transaction trail of shuffled coins as transaction inputs cannot be easily linked to their respective outputs.
Mixing can be implemented in a custodial or non-custodial manner. In a custodial format, users relinquish control of their bitcoin inputs to the mixing service. The obvious risk is a security breach or malicious service provider could lead to a complete loss of funds with little chance for financial recourse (one drawback of immutable transactions). In response, a few non-custodial bitcoin mixing frameworks were developed to provide a trust-minimized mixing option.
CoinJoin is one of the more popular on-chain, trustless methods of combating the public nature of Bitcoin transactions via mixing. It was first proposed back in 2013 by Bitcoin core developer Gregory Maxwell, alongside a few other developers. CoinJoin works by combining inputs from multiple users into a single large transaction. This grouped final transaction makes it difficult to distinguish which inputs are paying which outputs. Andreas Antonopoulos adds that each “participant partially signs their input and their output in such a way that the transaction can proceed where [users] do not have to trust other participants.” Mixing these inputs and outputs over several rounds of transactions can obscure links to past transactions to an even greater extent.
CoinJoin later served as the base framework for the Coinshuffle++ (and its precursor, CoinShuffle) and ZeroLink protocols. CoinShuffle++ set to improve upon the coordination of participant signatures by excluding unsigned transactions and reducing the risk of a denial of service (DoS) attack. ZeroLink used a derivative of CoinJoin (dubbed Chaumian CoinJoin) to create a pre-mix, mix, and post-mix framework for bitcoin wallets in an effort to improve wallet mixing standards. CoinJoin has also been implemented in JoinMarket, DarkWallet, and SharedCoin, as well as the Samourai and Wasabi wallets via ZeroLink.
A key challenge for users is that CoinJoin does not hide the value of each input and that its effectiveness is dependent on the number of total inputs (or “anonymity set”). The downside of wallet-based CoinJoin is that users have to opt-in to use the service. This diminishes its effectiveness because users either aren’t aware of these services or may not care enough to go through the trouble of using them, resulting in a small set of CoinJoined transactions (a small “anonymity set”). This does not effectively hide originating addresses and destinations. Small anonymity sets combined with public transaction values may make it possible for chain analysis firms to decrypt mixing techniques like CoinJoin, rendering related wallets and services insufficient. [Note: One proposed solution is Confidential Transactions, a cryptographic concept also introduced by Gregory Maxwell that intends to hide the value of an unspent transaction output (UTXO).] But for the moment, mixing services appear to be working as advertised. In a recent report, Chainalysis said it could identity coins that were sent to and from mixers; however “[a] common misconception is that one can trace the path of funds through a service.”
While CoinJoin and similar schemes may improve Bitcoin user privacy, mixing services are viewed unfavorably by government agencies for their role in laundering stolen coins and shielding illicit transactions. For instance, the Dutch Financial Criminal Investigative Service seized and shut down the website for Bestmixer.io back in May, stating its investigation revealed the bitcoin transaction mixer was likely used to “conceal and launder criminal flows of money.” But these regulator concerns may be overstated. Chainalysis research found less than 11% of mixed coins were stolen or used on darknet markets. Therefore, the firm suggests most Bitcoin mixing services are used for personal privacy reasons, not illegal activity. As a result, the rise in recent mixing activity can be attributed to growing demand for on-chain anonymity.
This need for privacy also led to creation of alternative, privacy-focused crypto networks. Privacy coins such as Zcash, Monero, and MimbleWimble-based assets (Grin and Beam) were developed to address the concerns surrounding Bitcoin’s transparent design. Some of these networks have adopted Bitcoin mixing schemes to enhance transaction privacy. For instance, MimbleWimble (thus Grin and Beam) uses CoinJoin and Confidential Transactions to help achieve unforgeability while, at the same time, optimizing for transaction privacy.
For more on CoinJoin and Confidential Transactions, check out our in-depth report on MimbleWimble.
Weekly market snapshot
In other news
Blockchain, one of the largest crypto wallet providers with ~41 million users, partnered with crypto payments processor BitPay. BitPay is now integrated into Blockchain Wallet so Blockchain’s customer base can pay for products and services in crypto from BitPay’s network of merchants. Source.
Loom is releasing a new “CryptoZombies” coding tutorial designed to teach users the basics of developing on Facebook’s Libra network. Loom, a layer 2 chain secured by its own delegated proof of stake consensus mechanism, aims to enhance developer experience and has already released a series of learning materials, akin to Code Academy, to familiarize developers with building smart contracts. Source.
Radar launched an app store that provides users a connection to the growing ecosystem of Lightning apps (or lApps). The company started by running an Ethereum-based decentralized exchange (DEX). Radar later expanded its influence to Bitcoin when it released the Radar ION platform in March that provides Lightning-related news, developer tools, announcements, and tutorials. Source.
Data provider Nomics unveiled a new metric, called Transparent Volume, that calculates the percentage or real trading volume for individual crypto assets. Volume is only categorized as transparent if it is reported by an exchange that Nomics has already determined to be legitimate via Nomic’s Exchange Transparency Ratings framework. According to Nomics, any volume labeled as transparent is less likely to include wash trading or other forms of artificial volume. Source.
Coinbase released its second annual Leaders in Crypto Education report and found that over half of the top universities now offer at least one class on crypto or blockchain. The new total marked a 25% increase from 2018. Coinbase also noted extra curricular crypto offerings, such as research initiatives and student-run crypto clubs, increased year over year. Source.
Dharma launched a new beta version of its Ethereum-based peer-to-peer lending platform. The startup sunsetted the first version of its lending service after loan originations fell almost 85% from April to June. Dharma v2 is also lending platform, but it leverages Compound Protocol’s smart contracts and liquidity pool. This new version will allow users to borrow and lend at fixed interest rates, though lending functionality will be introduced at a later date. Source.
Erasure Protocol, a protocol built by crypto startup Numerai, launched on the Ethereum mainnet. Erasure aims to incentivize the transaction and tracking of high-quality data feeds. Source.
Algo Capital, a fund dedicated to Alogrand ecosystem development, raised $200 million to invest in companies building on the Algorand network. Fund commitments were said to be denominated Algos, Algorand’s native token, and not USD. The fund’s current portfolio includes security token issuance platform Securitze, DEX provider Idex, and settlement platform OTCXN, among others. Source.
Global regulatory roundup
In the Kleiman vs. Wright lawsuit, a judge ruled in favor of the late Ira Kleiman and his family. The court found Craig Wright acted in bad faith and admitted false evidence during the proceedings. As a result, Wright was ordered to forfeit half of his Bitcoin holdings acquired prior to 2014 as well as half of his intellectual property to the Kleiman family. Source.
Switzerland’s Financial Market Supervisory Authority (FINMA) issued separate banking and securities dealers licenses to blockchain firms EBA Crypto and Sygnum, the first time such licenses were awarded to blockchain service providers. The licenses will allow both firms to start providing services to institutional customers. Source.
What we’re reading
- Where stablecoins are headed by Linda Xie
- Bitcoin for safety by James O’Beirne
- Crypto Monetary Policies by Florent Moulin (Messari)
- Cross-Chain Infrastructure Revisited by Kain Warwick
- The Dawn of Hybrid Layer 2 Protocols by Vitalik Buterin
- Superficial Regulation Is Key Cause for Cryptocurrency Scams, Thefts and Lawsuits by William Mougayar
- Use of digital assets in Venezuela, Palestine, and natively by Tony Sheng
- Bitcoin & Macroeconomic Uncertainty by Luka Jankovic & William Nuelle (Galaxy Digital Research)
What we’re listening to
- a16z: From the Internet’s Past to the Future of Crypto
- The Crypto Street: The Future of Wealth Management with Tyrone Ross Jr.
- Epicenter: EthHub (Anthony Sassano & Eric Conner) – Ethereum Education and the Quest for Ether Dominance
- What Bitcoin Did: Brian Lockhart on Running a Bitcoin Full Node
- Unchained: After Years of Secret Work, Decred Adds a New Feature: Privacy
- Into the Ether: Talking Ethereum 2.0 with Danny Ryan
- Base Layer: Mike Alfred (Digital Assets Data)
- Blockchain Insider: Crypto banks
Circle in the news
Poloniex has distributed more than 2 million Stellar Lumens to customers!
Where we’ll be in September
- DAXPO Busan 2019, Korea, 9/3
- Invest: Asia, Singapore, 9/11-12
- Trading Show New York, 9/25
- Korea Blockchain Week – D.FINE, Seoul, 9/30 – 10/1