What You Need To Know About CoinJoin. The Darkside of Privacy

Transparency is hailed as a cornerstone in blockchain transactions. Although famous for being pseudonymous, the public nature of the blockchain ledger ensures that all transactions and data are viewable and verifiable by anyone, establishing trust and security within the cryptocurrency industry. 

However, parties seeking enhanced privacy and to shield their transaction history from prying eyes can leverage various existing anonymization techniques. These methods obscure the origin and destination of cryptocurrency transactions, minimizing this inherent transparency. 

Oftentimes, illicit actors leverage the same privacy-distorting techniques to obfuscate the trace of nefarious activities and set back investigators following their tracks. One of the prevalent methods they utilize is Coinjoin. This technique fulfills multiple transactions in a single larger one, combining multiple inputs and outputs to make it difficult to trace which inputs and outputs belong to a specific individual.

By pooling funds with other users in that way, Coinjoin participants effectively mix their transaction history, making it challenging for investigators to track the flow of funds from nefarious activity proceeds back to their perpetrators.

Wasabi wallet is a popular specialized cryptocurrency wallet that incorporated Coinjoin functionality until recently. Launched in 2018 by zkSNACKs Ltd., Wasabi has gained attention within the cryptocurrency community for its use of privacy-preserving technologies and Tor network integration. It has also become a point of interest for cryptocurrency investigators due to its association with illicit activities.

ZkSNACKS announced on May 2nd that they would phase out support for Coinjoin transactions starting June 1st. They cited rising regulatory scrutiny of cryptocurrency privacy protocols by U.S. authorities as the main reason for their decision.

Development of Wasabi Wallet

Wasabi was created by Adam Ficsor, a prominent developer and privacy advocate, who saw the need for a wallet that could offer Bitcoin users a higher degree of privacy. The belief that Bitcoin transactions should be as anonymous as possible, similar to cash transactions, motivated the development of Wasabi to protect users from surveillance and potential misuse of transaction data.

The wallet quickly became known for its privacy features, particularly its integration of the CoinJoin protocol. This integration made it accessible to a wider audience. Wasabi discontinued its CoinJoin protocol in June due to regulatory concerns in the United States. 

In 2023, the US Department of Justice arrested the founders of Samourai Wallet, another privacy-focused cryptocurrency wallet. They were charged with money laundering and operating an unlicensed money-transmitting business.  

How CoinJoin Works

In a CoinJoin transaction, several users contribute their funds to a mixer. The mixer then combines these inputs into a new transaction, distributing the total value to new output addresses. By ensuring that the outputs are of similar sizes, the mixer increases the difficulty of determining which output belongs to which user.

This technique relies on the anonymity provided by blockchain technology. Advanced analysis techniques or insider information could still potentially compromise privacy in various cases.

Example

Consider a CoinJoin transaction with two users, Alice and Bob. Alice has 1 BTC and Bob has 2 BTC. They both want to mix their funds.

1. Combining Inputs: The mixer creates a new transaction with inputs of 1 BTC from Alice and 2 BTC from Bob.
2. Creating Outputs: The mixer then creates outputs of 1.5 BTC, 1 BTC, and 0.5 BTC.
3. Privacy: It’s now difficult to determine which output belongs to Alice and which belongs to Bob. An observer might assume that Alice received the 1 BTC output, but this is not necessarily the case.

Overall, CoinJoin offers a valuable tool for protecting user privacy in blockchain networks like Bitcoin. By making it more difficult for malicious actors to track funds, CoinJoin contributes to a more secure and private digital ecosystem but also opens opportunities for illicit actors to get away with criminal proceeds.

Double-edged sword

It’s established that Coinjoin offers a measure of anonymity and financial privacy, and in addition to that, brings significant regulatory concerns. One of the primary concerns is the potential for coinjoin to be used for illicit activities. By obscuring the origins of funds, it can facilitate money laundering and terrorist financing. Additionally, it can be employed to evade sanctions and engage in prohibited transactions. 

Furthermore, coinjoin can be used to hide income from tax authorities, enabling tax evasion and hindering the enforcement of tax laws. 

To address these concerns, regulatory bodies and law enforcement agencies are closely scrutinizing the development and use of coinjoin technologies. Governments are using blockchain analytics tools as the main line of defense against suspicious Coinjoin services. 

QLUE™ by Blockchain Intelligence Group is a leading blockchain analytics tool that enables law enforcement investigators to follow the flow of funds on the blockchain and swiftly identify suspicious patterns or interactions with CoinJoin protocols. QLUE helps investigators to reinforce transparency and trust within the cryptocurrency industry, and detect and prevent the misuse of Coinjoin.

Learn more at blockhaingroup.io