- Blockchain’s public ledgers underpin trustless security but at the cost of compromising people’s transactional privacy
- Privacy is security. Protecting people’s financial data is need for crypto adoption to continue
- Crypto mixers come with significant risks, including wallet tainting, exchange sanctions and potentially legal liability
- Vitalik Buterin’s proposal for a new type of mixer illustrates the sector’s desire to solve the problem of privacy
- Houdini Swap uses a unique approach, which provides people with compliant transaction privacy and is a true alternative to crypto mixers
Public blockchains are by their very nature, public. Their trustless security arises from their decentralization, anyone anywhere can interact with them. In doing so an immutable ledger is developed, where every transaction is recorded forever. Go to any blockchain explorer and you can get a complete history of every transaction ever processed.
It means crypto transactions allow your wallet’s assets and complete financial history to be easily seen by anyone with your wallet address, which more often than not means anyone you send crypto to. There are hacks for this obvious privacy flaw but each comes with its own set of risks and challenges.
Until recently the only credible solutions involved always transacting through centralized exchanges or transacting only on a privacy blockchain, both of which for various reasons present very significant limitations. The other option was to use crypto “mixers”, or “tumblers”, which as has become all too evident, present very real risks.
The risk of using mixers
Centralized mixers present an inherent privacy challenge. While the links between sender and receiver are not public, centralized mixers have the permanent record connecting all the transactions which means users must trust them to keep this private in perpetuity.
However, not everyone agrees with this idea, as it tries to balance following the law and keeping things private. This has sparked debates about its legality, and there are also issues with crypto mixers.
The tainting of users
For decentralized mixers the issue is their rampant use in illegality, and so potential targets of law enforcement. Their reputations are so bad that many large centralized exchanges prohibit the use of “mixed” crypto. Since exchanges can identify mixers, they can identify crypto sent from them as high risk or ‘tainted.”
Mixers therefore come with the real risk of a user’s wallet being identified as high risk or ‘tainted’ with the exchange sanctioning its future use and potentially the wallet being blacklisted across the sector, or even freezing crypto assets used in the transaction until the matter has been rectified to their satisfaction.
Does that mean mixers are illegal?
Whether mixers are legal depends on where you live. Decentralized mixers are well recognised by enforcement agencies worldwide as being used in illegal activity, and have become a significant focus for them. While mixers are not explicitly illegal in most places, different countries do have different laws.
What the US thinks about mixers
The US has taken a particularly strong approach, where mixers are now classified as money transfer services, requiring registration with FinCEN, KYC/AML measures, and compliance with regulatory requirements, which entirely defeats their intended purpose.
“Seeking to obscure virtual currency transactions in this way (using mixers) is a crime.”
The recent arrest of Tornado Cash’s developers plus the previous arrest of the creator of Helix and the arrest of Bitcoin Fog’s operator, all for various money laundering crimes, makes it very clear what the DOJ’s view is.
Deputy Assistant AG Brian Benczkowski stated in relation to Helix, “Seeking to obscure virtual currency transactions in this way is a crime.” While not yet jury tested this position highlights that for users with perfectly legitimate reasons extraordinary caution must be taken in using crypto mixers.
Enhancing transaction privacy is crucial and especially so if the technology is to ever go mainstream.
None of which helps to resolve the issue for legitimate users seeking to prevent untrusted prying eyes from seeing their financial data. One thing is clear in the world of cryptocurrency; enhancing transaction privacy is crucial and especially so if the technology is to ever go mainstream.
The issue has become so significant that a research team which included Ethereum’s Vitalik Buterin published a paper on a new design of mixer to provide transactional privacy while overcoming their problems.
Vitalik Buterin’s crypto mixer proposal
On September 12, 2023, Vitalik Buterin and a group of researchers published a proposal to improve cryptocurrency mixers by combining zero-knowledge proofs and privacy pools in a new way.
The intention is to allow mixer users to prevent access by bad actors who have been identified as high risk with this being managed by a group of trusted users managing the mixer.
It has certainly sparked debate about its effectiveness and possible legality and is only conceptual at this stage, meaning legitimate users have had until recently very limiting options.
Houdini Swap’s Unique Approach to Privacy Swaps
Houdini Swap emerges as a valid alternative to cryptocurrency mixers like Tornado Cash. Unlike crypto mixers, which hide where funds come from and go to by mixing transactions, Houdini Swap works like an automated bridge between exchanges. Its core objective is to sever all on-chain links between sender and recipient wallets by employing Monero as a secure “tunnel” between exchanges.
Notably, Houdini Swap never holds, transmits, or manages users’ funds; instead, the legal responsibility lies with the exchanges. This focus on being open and clear about who does what creates a sense of trust and legality in the community.
With its straightforward and compliant approach to privacy swaps, Houdini Swap offers a user-driven solution that acknowledges the paramount importance of both transparency and data protection within the community.
The missing piece in DeFi’s development
As DeFi continues to change how finance works, adding privacy solutions is a crucial step. It can encourage more people to use DeFi and help it grow in a sustainable way. These privacy solutions do more than just protect user privacy; they also make DeFi protocols work better and faster.
The key to encourage users to participate confidently in DeFi ecosystems is finding the right balance between transparency and privacy.