CoinJoin – Bitcoin Protection and Privacy Tool
Today, protecting your data and funds is becoming the number 1 task. Returning to the topic of privacy, it is impossible not to mention such a tool as CoinJoin.
There are other similar services, for example, mixers, but this one is different from them. Mainly because when using CoinJoin, the intermediary never stores the funds. Thanks to this mechanism, the user constantly controls his Bitcoin.
When creating a CoinJoin type transaction, users work together, entering the initial data into the transaction and receiving the same amount of BTC as they invested. All in the same quantities.
For example, if 5 users enter 1, 2, 3, 4 and 5 BTC into a transaction, a total of 5 inputs will be made for a total of 15 BTC. However, there will be 15 outflows, each for 1 BTC.
Since the total amount of outflow is equal to the total amount of inflow, it is impossible to determine how much BTC each user is entitled to.
It should be noted that CoinJoin transactions can still be decrypted using statistical analysis tools, but this task is more costly and complex than if they were not used.
As more and more companies are engaged in forensic analysis of the Bitcoin blockchain, and many of them receive funds from governments, the use of these tools is necessary so that no one can determine the identity behind them and the way the funds flow.
How CoinJoin Works
CoinJoin works using the coin shuffling protocol. That is, it combines the transactions of many users, and creates a transaction with several parties.
The protocol then shuffles multiple input and output signatures before the transaction takes place. This approach allows you to achieve a new UTXO combination.
In fact, CoinJoin uses a multi-signature transaction method, and brings a little more flexibility.
The system requires that the signatures of each transaction be completely independent of the others. Thus, multiple digital signatures are required to approve a transaction. The CoinJoin transaction will not be valid and will not be accepted by the network until all signatures are provided.
The system is designed to achieve consensus on inputs and outputs as long as all participants agree. This ensures that neither side can do anything to the detriment of the others.
A user who wants to implement this system in Bitcoin must find at least one more user willing to do the same. Then together they can initiate a CoinJoin transaction, in which their transactions will be specified as input.
It doesn’t make sense that all the inputs are from one user, since a third party who knows him can determine at a glance that all the outputs are also from him.
After the parties involved become known, the next step will be to determine the size of the outputs, since they must all be equal. Thus, the number of Bitcoins at the entrance will be divided equally.
Thus, one user can own only one output, and the other can own several. The good thing is that this is known only to the persons involved, while for a third party the outputs are indistinguishable.
Finally, the outputs must point to new Bitcoin addresses, otherwise the meaning of the whole process is lost.
Advantages of CoinJoin
This strategy has many advantages for users and the market as a whole. First of all, because it adds an additional level of privacy, since these transactions are structured in such a way that it is more difficult for outsiders to determine how a payment occurs and where it is sent.
Most importantly, CoinJoin does not require changes to the Bitcoin protocol.
And so, to the advantages:
Firstly, it makes it impossible to steal cryptocurrencies during the entire process.
This is different from the BTC mixing protocol, where a third party is required to trust the funds. On the other hand, they also add a point of failure as these third parties know the past of these Bitcoin transactions.
Another very important advantage of CoinJoin is that transactions are cheaper than transactions with Bitcoin.
As part of this type of operation, many transactions are carried out, combined to achieve an effect, so although the fee for services increases due to a larger transaction, it is also divided among all participants.
CoinJoin transactions help alleviate the congestion problems of the Bitcoin network.
If we have a CoinJoin with two participants, it takes up less space than two separate transactions. As a result, more transactions can be added to the Bitcoin block and processed.
One of the most important goals of CoinJoin in the market is to help Bitcoin maintain interchangeability. This term refers to the ability of an asset to be interchangeable. For example, gold is interchangeable because two pieces of gold of the same sample and weight have the same value and are indistinguishable from each other.
Unfortunately, the forensic analysis of Bitcoin transactions threatens to remove this feature from the network. If the government wishes, it can easily track down and punish specific Bitcoin users, which will greatly affect the entire network.
When someone uses CoinJoin, this practice is more complicated. Especially if users use IP address obfuscation mechanisms, such as Tor.
History of CoinJoin
As he tells us Coinmarketrate.com the concept of CoinJoin has been with us for a long time. This idea originated in 2013, and it belongs to Bitcoin Core developer Gregory Maxwell, who published it in the BitcoinTalk branch.
Since then, this mechanism has been used in many blockchain-based systems.
Why is Bitcoin not an anonymous cryptocurrency?
Although Bitcoin had a reputation for anonymity in the early years and was used in transactions where illegal goods and services were purchased, as in the case of Silk Road, the reality is that it provides almost no privacy.
Although the BTC addresses do not contain the name and address of their owners, they are easy to track, and if desired, someone can associate an IP address with them. After identifying the user, the investigator can use analysis methods to track all transactions made by him on the network.
This is not a mistake in Bitcoin, but part of its consensus mechanism, which allows it to be an unreliable currency in this regard. The fact that transactions are public prevents fraud, although ultimately it undermines the privacy and anonymity of the cryptocurrency.
It is for this reason that this method began to be used. But this is not the only cryptocurrency using CoinJoin, there are others that have implemented it directly into their code.
This is the case with privacy-oriented cryptocurrencies such as Monero, ZCash and Dash.
Monero is very similar to CoinJoin, because it uses a signature ring containing signatures of other users, which makes it almost impossible to track addresses.
Dash also uses CoinJoin directly in the core of its protocol. Although the cryptocurrency was originally conceived as privacy-oriented, which it remains, today it is more focused on supporting decentralized finance. And all this in the presence of the CoinJoin function, through the PrivateSend function.
The first generation of privacy tools
When 3 transactions occur simultaneously, for example:
A buys goods from B, C buys goods from D, and E buys goods from F, the blockchain records these 3 transactions separately, which allows anyone to see that certain people have bought certain goods from others. Maybe it’s not such a big problem if you don’t know who these people are, but there are more and more tools for this.
However, with CoinJoin, we can disguise the parties involved in this process and create a single transaction. This became very attractive for people who, for various reasons, needed to hide their financial movements.
This is how this method of increasing privacy emerged and became increasingly popular. This led to the creation of other solutions that offered something similar.
In a sense, CoinJoin has paved the way for the development of other mechanisms to achieve the same. This was an important step towards increasing the level of privacy in the main cryptocurrency.
Is it illegal to use this tool?
For some users, those cryptocurrencies that go through these processes may be marked as “corrupted” in the future and therefore not accepted by exchanges.
There is some truth in this statement, but it is also true that this problem can be solved very easily.
In this case, we should just open the Lightning channel, and everyone who receives a transaction through this network will not be able to find out whether it is the result of CoinJoin or not.
Currently, it is not difficult to find platforms that allow you to work with CoinJoin. There are several wallets that allow you to use this interesting functionality.
Wasabi Wallet is one of such systems that allows you to add privacy and anonymity to our funds.
This is a wallet in which we have control over our private key, it is open source, and we can download it for use on our computer with Linux, Windows and macOS operating systems.
To do this, he commits CoinJoin with other wallet users, which makes the process efficient. In addition, it works with the Tor network to make it all more anonymous.
Samurai Wallet is another popular option on the market that offers integration with CoinJoin.
Samurai has other very interesting features, such as stealth mode when it comes to protecting our assets.
When stealth mode is activated, the wallet icon will be hidden on the phone. This feature is unique to the wallet, and provides an additional level of security in case of loss or theft of the phone.
Although the concept is quite interesting, especially since it served as an impetus for the development of other mechanisms, in practice, transactions are difficult for a number of reasons. In order for users to remain anonymous, it is necessary that they work with the Tor network. At the same time, they need to know some code, and trust each other.
Fortunately, the developers of CoinJoint have been working from the very beginning to create tools that automate the entire process for users.
So we found old wallets that used this feature, such as Dark Wallet, JoinMarket and SharedCoins. However, some projects have been abandoned, or are not as popular today.
There are also new developments that have more modern features and are easy to use. Keep in mind that you are relying on a third-party wallet that may or may not collect information about what you are doing, which will make all this work irrelevant.