Basic theory of Bitcoin mixing, part 1
What information is already public?
If you own or use some Bitcoin then at least one transaction has been confirmed on blockchain. There is no need to worry - that is how Bitcoin works.
Lets assume you have received 10 mBTC from your friend Bob. You gave them your public address and they have sent you. You can find this transaction with your wallet or blockchain explorer to see the details.
Transaction notes your address received 10 mBTC from different address. You know its Bobs but it is probably not public. If you are curious (and you are if you are reading this) then you can check how much Bob has. Balance of public addresses is public after all.
If you check transaction outputs - your 10 mBTC is one of them - you will find that Bob also sent somebody 20 mBTC. You were discussing it at work with Bob and Alice. It is possible it is Alices public address and Bob likes her more than you.
Furious you go for coffee. Barista shows you printed QR code. You mindlessly pay 0.1 mBTC with your mobile wallet. Your blockchain privacy has been lowered. How?
Baristas deposit address is printed which means it has been used by every bitcoin-using customer. Everyone around seen you pay with Bitcoin to public address and they can check your transaction to know your public address and how much Bitcoin you have. Bob is not there but he also knows where and when you have been drinking. Your coffee-induced habit has been recorded on blockchain forever.
You go out to your favorite vegan store. You try to pay when owner checks something on their computer and visibly reddens. They start shouting about unfair practices and slavery of coffee plantations. You are banned and cannot come back. What happened?
Baristas public address is well known. Vegan store owner may check if somebody transacts with them. When you paid for coffee - they did not know. But your vegan transaction is linked to previous transaction making it impossible to hide. If you could mix your Bitcoins you would have avoided that.
What is Bitcoin mixing?
Bitcoin mixing is set of on-chain and off-chain transactions that increase blockchain privacy.
'on-chain' means sending funds and having them confirmed on blockchain. This transaction is public and can be seen by anyone. Due to blockchain data being saved forever - every 'on-chain' transaction of human history is recorded.
'off-chain' means moving Bitcoins outside of blockchain. If you deposit Bitcoin into cryptocurrency exchange or betting website then its ownership and value changes depending on your actions on that service. Its history is accessible to you, service employees and third parties they share their data with.
'increase blockchain privacy' means reducing how much of your financial information is available and how big knowing group is it.
How do you 'mix Bitcoins'?
By definition - by creating on-chain and off-chain transactions. You can do it 'by hand' use 'mixing software' or 'mixing services'.
Before you do that you must always ask yourself how much privacy you want and how much comfort you are willing to pay for that. Achieving near perfect privacy costs a lot of effort and you would need to read and understand what to do and why it works. On the other hand if you want only bit of privacy to stop Bob snooping around - just pick any reputable mixing way and start using it.
Basic rules of Bitcoin mixing
First - no web-wallets. If you keep your Bitcoins on somebody else computer it is pointless to mix. You will not be able to see coins you own and you will not be able to make correct assumptions.
Second - learn how Bitcoin works and how to use blockchain explorers to display transaction information.
Next part is about types of mixing and how do they work.part 2 >>>