How do CoinJoin and other privacy-enhancing tools function, and what are their limitations in providing complete anonymity on the Bitcoin network?
CoinJoin and other privacy-enhancing tools aim to obfuscate the transaction history on the Bitcoin network, making it more difficult to link transactions to specific users. Bitcoin's public ledger, while pseudonymous, is not private by default, meaning that transactions can be tracked back to wallet addresses. Privacy tools aim to break these links and provide users with a higher level of anonymity.
CoinJoin is a collaborative transaction technique that combines multiple Bitcoin transactions from different users into a single transaction. In a CoinJoin, several participants come together to combine their outgoing transactions into one larger transaction. Each participant contributes some Bitcoin to the mixer and receives the same amount of Bitcoin at different output addresses that are not linked to their original addresses. This process effectively breaks the direct link between the original sending addresses and the final receiving addresses, making it much harder to track the flow of funds. An example of how this works is that several users, lets say four, each wants to send 1 bitcoin. Instead of making four separate transactions, all users send their 1 bitcoin into the coinjoin transaction, which mixes all the inputs into a single output. Then, four outputs are created and each receives 1 bitcoin. These outputs, and the associated receiving wallets, are not linked to the original users, thus breaking the chain of traceability. The benefit of CoinJoin is that it creates a high degree of plausible deniability. Because many users are involved, it is difficult to determine where each input originated and which user controls the final output. Tools like Wasabi Wallet and Samurai Wallet incorporate CoinJoin functionalities.
Other privacy-enhancing tools include techniques like mixing services, which function similarly to CoinJoin, but often using a central server, which brings its own set of risks. These services collect the bitcoins of multiple users and then send the same amount of bitcoins to other addresses that are not directly linked to the inputs. These services, however, often charge a fee and carry a risk of being dishonest. They require trusting an external service with one's cryptocurrency, which is a vulnerability. Another privacy tool includes using new addresses for each transaction, preventing the reuse of addresses that make it easier to link multiple transactions. This can also help to enhance privacy in the network.
The limitations of these privacy tools lie in their inability to achieve complete anonymity. While they add significant layers of obfuscation and make it harder to track transactions, they are not foolproof. First, metadata analysis can sometimes reveal transaction patterns. Even after using CoinJoin, patterns in the amounts or timing of transactions may provide some clues. For example, if a user sends a very large transaction right after using CoinJoin, some sophisticated observers might suspect the change in amount came from the coinjoined amount. Furthermore, the central servers of mixing services are single points of failure, and if they are compromised or tracked, the traceability of the transactions is compromised too.
Secondly, network analysis can sometimes link different transactions. Network analysis techniques can sometimes try to detect which inputs belong to the same user. Blockchain analysis firms use these patterns to try to track user behavior, and they can link clusters of transactions even if privacy tools have been used. Also, If the service implementing the mixing or CoinJoin has logs, it can easily re-link the inputs to outputs. Even CoinJoin is not entirely anonymous because if the number of people in a CoinJoin transaction is small, and if one or two of the participants are known, then the degree of anonymity for the rest of the transaction is reduced.
Lastly, the overall transaction history of bitcoin is publicly available. If a user is not careful in how they manage their inputs and outputs, they might accidentally reveal information. For example, if a person mixes bitcoins, but then immediately sends a small amount to a well-known exchange, the exchange would now have access to a chain of transactions that included a mixed input, possibly linking the mixed coins to the person. The effectiveness of privacy tools relies on users' best practices and a combination of techniques. Users must take care to avoid revealing identifying information outside of the blockchain. In conclusion, CoinJoin and other privacy tools can significantly enhance privacy on the Bitcoin network, but they are not perfect and do not guarantee complete anonymity. Users need to be aware of the inherent limitations and use these tools in conjunction with best practices to maximize their privacy.