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Ruth Kise 23 Aug 2023 ◦ 8 min read

Crypto Mixers and the Story of Tornado Cash

Crypto Mixers and the Story of Tornado Cash

All transactions in the network of Bitcoin and many other cryptocurrencies are recorded in the blockchain, so this system is as transparent and public as possible. But at the same time, such transparency is a significant drawback for cryptocurrency holders who want to remain completely anonymous. Bitcoin addresses (to a certain extent) can be tracked and associated with real personalities. Thus, investors risk disclosing their data and tracking their account transaction logs. To solve this problem, mixers were developed.

In this article, we will consider the concept of a cryptocurrency mixer, the principles of its work, why it is needed, as well as its vulnerabilities through the example of Tornado Cash.

What Is a Crypto Mixer?

A crypto mixer or bitcoin tumbler is a service created to increase the privacy of transactions in cryptocurrency networks. When the user makes a transaction through a coin blender, it is divided into tens or even hundreds of small transactions and mixed with the transactions of other users. This is designed to completely hide the original tracking and confuse all subsequent ones as much as possible. In addition, custom logs are automatically and permanently deleted within 24 hours of successful blending.

Types of Crypto Mixers

All mixers fall into two categories:

  • Centralized. They are managed by a specific person or company. Such mixers are of high quality, and have an excellent design, but alas the user is forced to be depending on their honesty and the severity of the performance of obligations. They charge large commissions to run the cryptocurrency, roughly 3%. And you have to take into account the chance that the resource can save operation logs for technical purposes. This increases the risk of hacking and leaking transaction data to third parties. That is, there is still a risk to anonymity.
  • Decentralized or peer-to-peer. That is, transactions are mixed without the participation of an intermediary and use only special smart contracts. They guarantee the privacy of users, do not record data, and their creators cannot escape with assets. But technically, they are more difficult to use, especially for beginners. One of the most important conditions for the operation of peer-to-peer crypto blenders is a large number of customers.

How the Mixing of Coins and Its Features Take Place

The pace of coin mixing depends on several factors, such as the chosen cryptocurrency, for example, Bitcoin, and the amount of the transaction. After you leave the order, your crypto will head to the pool and wait for confirmation from the miners. And then go to the indicated wallets in a cleaned form.

The number of bitcoin addresses and the number of transactions should be taken into account. This is 56 translations. To further increase anonymity, mixers use deferred transaction technology. Almost all mixers, in order to maintain privacy, delete logs after a day, and also allow you to delete them by yourself. The bitcoin address generated by the blender usually works for 24 hours and is applicable only for transfers within the service.

Usually, bitcoin mixers prohibit accepting crypto at the previously used address. And of course, KYC verification is not required here. When conducting a transaction, the service gives out various important information: a letter of guarantee, confirming codes, addresses of wallets. It is important here not to accidentally close the tabs with important information, since they will be useful for obtaining currency for other wallets. Already cleared money will go into them. Be careful if the coin number is below the lower threshold for a mixer: it can go to developers as a donation.

Why Should I Mix Coins

Many people believe that crypto mixers are needed only to launder illegally received money. Of course, there is some truth in this. But there are other reasons, for example, hiding their income from other people.

For instance, bitcoin is a cool tool for online purchases and p2p transactions, with which you can make trade transactions bypassing the banking system. But again, all transactions are stored on the blockchain. It turns out that if someone knows the address of your wallet, they can track the movement of the funds. Where is the promised anonymity? Such transparency seems outrageous to many. So bitcoin mixers are a good way to hide data on your wallet. No one will be able to watch your beats. 

Talking about legality, the legislation of many countries has not yet reached the cryptocurrency regulation, and even more other projects related to it. Therefore, the use of mixers is now legal there.

Crypto Tumbling Cons

The story of privacy at the expense of mixers is far from ideal. In 2022, decryption of mixers is possible, yes. Experts have already calculated the likelihood of decrypting the bitcoin tumbler. It is about 95%, and the decoding itself became possible thanks to the analysis of clustering.

Two projects Bitfury and Chainalysis have developed algorithms to identify related bitcoin addresses with high accuracy. Of course, this exposes mixer users to certain danger. These algorithms can calculate a person, and besides, demonstrate to the public who uses the coin blender.

And another significant problem is a large number of scammers in this sector. In addition to the fact that there are many fake pages and spoof sites, there is a risk that the crypto recipient will get "dirty" coins, as a result of mixing the sender's funds with illegal bitcoins of other customers. 

It is the movement of illegal money that attracts the attention of the government. Feeling vulnerable, the state cannot but follow the action in the cryptocurrency market and anyway takes measures to resolve and counteract crime.

What Happened to Tornado Cash

One of these steps was the imposition of sanctions on the Tornado Cash mixer. On August 8, the US authorities imposed sanctions on a smart contract for a popular privacy application, which launched a real chain reaction and led to the arrest of one of the developers in the Netherlands.

TC was considered the safest mixer on the Ethereum blockchain, which gained its popularity among users. What to hide, it was used by both hackers from North Korea and very respected and public personalities.

Unlike many other mixers, in terms of communication with the outside world, Tornado Cash was a fairly open and public protocol that positioned itself as a tool for ensuring financial privacy. The founders and developers of TC were also well known in the crypto community.

Unfortunately or not, the lack of legislation regarding crypto mixers does not mean that they have some kind of immunity and can exist without regard to regulators.

According to the Financial Crimes Enforcement Network of US (FinCEN), mixers are money transmitters under US law and have a number of duties, including in the AML/KYC area.

Moreover, there are a number of precedents:

  • October 2020: FinCEN imposed a $60 million fine on the founder and operator of Helix and Coin Ninja mixers.
  • April 2021: The US Department of Justice arrested a 32-year-old citizen of Russia and Sweden, who was the creator of one of the first bitcoin mixers.
  • May 2022: OFAC has sanctioned Blender.io, a TC-like bitcoin mixer.

Taking this into account, it is difficult to call the imposition of sanctions on Tornado Cash very unexpected.

So the U.S. Department of the Treasury added the TC service and the associated crypto wallet addresses to the sanctions list, justifying its decision by the fact that the platform was used to launder illegal crypto assets.

What Was Next

Immediately after the publication on the OFAC website, a press release on sanctions was followed by a cascade of events and outbreaks from where they were not expected.

First, the site tornado.cash was blocked. Then the open TC repository on GitHub was deleted. The same fate awaited the developers of TC: GitHub blocked their accounts. Then the Discord server and forum on Discourse fell. By and large, at the moment all traces of Tornado Cash on the Internet were erased.

The reaction of individual crypto protocols was just surprising, namely recalling that the decentralized Internet and sovereign money are not so decentralized and sovereign.

The first to add fuel to the fire was Circle, the operator of the most popular stablecoin USDC, freezing $75,000 in stables. The crypto exchange dYdX did the same, even though the company has always shunned American jurisdiction, and positioned itself as outside its perimeter.

Next, MakerDAO got excited. Recalling that his reserve of 50% consists of USDC, one of the founders of MakerDAO, Rune, spoke up about the worsening regulatory climate — and among other things, offered to prepare for a break from the dollar. If so, the guys will have to convert USDC $3.5 billion into ETH. Perhaps it was this news that cheered up this week's ETH course.

Examples of Circle and dYdX were followed by other DeFi platforms, which started to add blocked addresses to their blacklists.

But the most shocking was the news of August 12 about the arrest of one of the developers of Tornado Cash. After all, it's one thing to impose sanctions on a protocol that, to be cunning, was really used by North Korean hackers, but another thing is to arrest a developer who created this protocol without any criminal intent.

A smart contract is a binary code that is stored on the Ethereum blockchain. Anyone who knows the smart contract address can interact with its functions by initiating transactions. The TC smart contract was fully autonomous. There was not a single person who could stop or interrupt its work. In turn, sanctions are usually imposed on criminals or political enemies. This time, sanctions were imposed on a neutral technology or tool.

To Sum Up

Undoubtedly crypto blenders are a useful tool that advocates the idea of anonymity. However, nothing stands still, and even as it would seem, new technologies become vulnerable to scammers. It is also worth remembering that in addition to honest crypto users, the market is attractive to criminal structures. This means that you are at risk of being with "dirty" crypto on your hands or having a run-in with the law. One way or another, be vigilant.

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