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How To Make A Private Bitcoin Transaction
Bitcoin is the most popular and widely used cryptocurrency in the world since its launch in 2008 with the mining of the genesis block. Over the last 12 years, it's been the catalyst for growth in the blockchain industry and the boom of alternative currency, also known as private money. Since the code for Bitcoin is open source, many projects have used it as a baseline to create a series of altcoins aimed at solving different problems, one of them being privacy of transactions.
Projects like ZCash, Monero and Verge have been vying for the title of privacy coin as its unique selling point and is an excellent alternative for those who want to cover up their transactions from being made public. The issue for many wanting to make a private transaction is the additional steps one needs to take to use these coins. You first need to have to buy Bitcoin, then transfer it to an exchange to get a privacy coin before you can proceed with your transactions. You are also subject to slippage as you lose value via the various trades and sending currency across multiple networks.
It also means that the recipient will need a privacy coin compatible wallet and they would then need to repeat the process to either convert to Bitcoin or find a vendor that accepts privacy coins for them to transact and use the money you sent.
Why is Bitcoin not private?
To secure the Bitcoin network and all transactions using the service, data is added to a distributed ledger with every miner on the network holding a copy and anyone in the world has open access to the network transactions via a tool called block explorer. These block explorers allow users to check the status of their wallet, the receivers wallet, the process of transactions and more. It also allows you to do the same to anyone's activity provided you have the wallet or transaction ID.
Bitcoin is known as a pseudonymous network since no personally identifiable data is stored on the chain, it cannot be tied back to an individual, however, if you know a users wallet address, you can track their transactions. The bitcoin blockchain is a permanent public record of all transactions accessible by anyone at any time; it is not anonymous.
How to make a private Bitcoin transaction
Hiding your transaction history on an open blockchain is not going to be simple; unfortunately, there are no protocols that support confidential transactions on the Bitcoin network yet. However, it is still very much possible to cover your transaction tracks with the help of a third-party service known as coin mixers.
What are coin mixers?
Coin mixers are a 3rd party tool that accepts Bitcoin transaction and combine several transactions into it with a giant pile before sending you smaller units of cryptocurrency to an address of your choosing and covers the tracks of your transaction. Coin Mixers generally charge between 1-3 % to mix a trade, and that's how these companies make money.
Coin mixers come in various implementations with the majority of coin mixers are centralised services, which should is a use at your risk case.
However, there are solutions where users don't need to trust anyone. Possible decentralised solutions for coin mixing include:
- A Lightning Network-style payment channels side chain
- Combining privacy coins in the mixing process
There is no outright winner in the mixing race so we will have to wait and see which option turns out to be the best solution.
How do coin mixers work?
These transaction tumbling services use of an algorithm that allows the service to obscure the history of the tokens they receive. A user will send their coins to a mixer which then jumbled them up with a pile of transactions and sends it to a large number of addresses in small amounts. It is this process that gives the services their name as they are 'mixing'.
Where can I find a Bitcoin coin mixer?Note: We do not endorse the use of any centralised mixing tools as they are unproven and are subject to change by the owners of the service so please take precaution when researching the various coin mixing services.
Smartmix.ioSmartMix allows you to mix your Bitcoin or Bitcoin Cash through their reserve pools. They will mix your coins with deposits from other SmartMix users. The coins are then mixed at random which results in a 'broken' chain that ensures the coins you receive are not connected to the deposit you sent in.
Wasabi walletWasabi wallet is a popular bitcoin wallet that has a built-in mixer with the help Chaumian CoinJoin mixer. Wasabi Wallet’s infrastructure is technically centralised, and it also offers a user-friendly interface to help users distinguish between mixed coins and non-mixed coins.
SamouraiSamourai Wallet also uses a Chaumian CoinJoin mixing service, called Whirlpool. Samourai wallet app is available on desktop and mobile. However, to use Samourai Wallet in a privacy-friendly manner (where users’ privacy is protected even from the Samourai Wallet team), users do need to connect their wallet to their full Bitcoin node.
JoinMarketJoinMarket allows you to merge transactions into larger transactions through (regular) CoinJoin operations, which also helps obfuscate their trail of coins and protects their privacy.
Keeping your finances a secret
When it comes to financial sovereignty, Bitcoin provides you with all you need to have full control over your money and how you use it. If you feel you want more privacy, you should be able to do so, and coin mixers are an excellent alternative for now. As we see the launch of second-layer solutions such as the lightning network and liquid network, I am sure that privacy solutions are on the way.
There have been discussions of a protocal solution in the form of confidential transactions (Litecoin claim to be adding it too) build into the main or side chains of Bitcoin.
Coin mixers may be a complicated workaround for now, but as popularity for the network grows and the need for privacy increases, it will only see the protocal for private transactions expedited to an earlier date.
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If you enjoyed this post and have a little extra time to dive deeper down the rabbit hole, why not check out the following posts on cryptocurrency and blockchain.
- Why Blockchain and Cryptocurrency Is The Future Of Money
- 24 Ways To Earn Cryptocurrency
- How To Pay Tax On Cryptocurrency In South Africa
- How To Buy Bitcoin In South Africa
- Why Does Your Bitcoin Wallet Address Keep Changing?
Disclaimer: This article should not be taken as, and is not intended to provide any investment advice and is for educational purposes only. As of the time posting the writers may or may not have holdings in some of the coins or tokens they cover. Please conduct your own thorough research before investing in any cryptocurrency as all investments contain risk.