CoinJoin Faces a Potential “Death Spiral”

In late April, the U.S. Federal Prosecutor’s Office charged the founders of the Bitcoin wallet Samourai Wallet with facilitating the laundering of $100 million for cybercriminals and sanctioned individuals. CEO Keonne Rodriguez and CTO William Lonergan Hill face up to 25 years in prison.

The arrest was prompted by the CoinJoin services Ricochet and Whirlpool. According to investigators, the wallet creators received $4.5 million in commissions.

Two weeks later, zkSNACKs announced the cessation of its transaction anonymization service to “ensure compliance with U.S. legal standards.” The company had long competed with Samourai Wallet and developed the Wasabi wallet with CoinJoin support.

Representatives from Mixer.Money believe these events confirm that CoinJoin will not replace Bitcoin mixers.

“The technology does not provide complete anonymity. CoinJoin transactions leave traces on the blockchain, which means they can be identified using on-chain analytics.

The developers of Samourai Wallet are accused of processing transactions from cybercriminals and darknet marketplaces. We cannot comment on their validity, but the situation undoubtedly negatively affects the peace of mind of Samourai Wallet clients,” note experts from Mixer.Money.

They do not rule out that after further investigations, exchanges may begin to automatically block accounts with coins that have passed through CoinJoin:

“We do not support any attacks on privacy, which is precisely what regulators are currently doing. Most likely, in light of the news, the number of CoinJoin transactions will significantly decrease.”

According to developers at Mixer.Money, a decline in user activity will negatively impact the technology, as the algorithm is only effective with a large number of participants:

“CoinJoin faces a ‘death spiral.’ The fewer inputs in transactions, the easier it is to trace coin owners. Such mixing makes little sense. Privacy advocates will be forced to seek alternatives.”

The mixer team recommends considering services capable of concealing the very fact of coin mixing:

“We mix coins in three modes: ‘Mixer,’ ‘Exact Payment,’ and ‘Full Anonymity’, where clients receive funds from centralized exchanges to two addresses.

Bitcoins enter a premixer, are split into random parts, and sent to investors trading on major international platforms. The latter send clean coins to the user: on-chain analysts see only the withdrawal transaction from the exchange to the wallet.”

Previously, representatives from Mixer.Money explained why trading platforms impose bans on crypto mixers and how to avoid blockages.