Bitcoin and Cryptocurrency Technologies

Figure 6.7 : Mixing. ​Users send coins to an intermediary and get back coins that were deposited by
other users. This makes it harder to trace a user’s coins on the block chain.
Online wallets as mixes. ​If you recall our discussion of online wallets, they may seem to be suitable as
intermediaries. Online wallets are services where you can store your bitcoins online and withdraw
them at some later date. Typically the coins that you withdraw won’t be the same as the coins you
deposited. Do online wallets provide effective mixing, then?
Online wallets do provide a measure of unlinkability which can foil attempts at transaction graph
analysis — in one case, prominent researchers had to retract a claim that had received a lot of
publicity because the link they thought they’d found was a spurious one caused by an online wallet.
On the other hand, there are several important limits to using online wallets for mixing. First, most
online wallets don’t actually promise to mix users’ funds; instead, they do it because it simplifies the
engineering. You have no guarantee that they won’t change their behavior. Second, even if they do
mix funds, they will almost certainly maintain records internally that will allow them to link your
deposit to your withdrawal. This is a prudent choice for wallet services for reasons of both security
and legal compliance. So if your threat model includes the possibility of the service provider itself
tracking you, or getting hacked, or being compelled to hand over their records, you’re back to square
one. Third, in addition to keeping logs internally, reputable and regulated services will also require
and record your identity (we’ll discuss regulation in more detail in the next chapter). You won’t be
able to simply create an account with a username and password. So in one sense it leaves you worse
off than not using the wallet service. That’s why we called out the tension between centralization and
anonymity in the previous section.
The anonymity provided by online wallets is similar to that provided by the traditional banking
system. There are centralized intermediaries that know a lot about our transactions, but from the
point of view of a stranger with no privileged information we have a reasonable degree of privacy. But
as we discussed, the public nature of the block chain means that if something goes wrong (say, a
wallet or exchange service gets hacked and records are exposed), the privacy risk is worse than with
the traditional system. Besides, most people who turn to Bitcoin for anonymity tend to do so because
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