Last August, the US Treasury sanctioned the Ethereum coin mixer Tornado Cash and banned Americans from accessing it. But what do platforms like Tornado Cash do, and why would any individual want to use them? In this article, I will discuss the technology behind coin mixers along with their legal and illegal uses.
Tornado Cash began operating in 2019. It is a blockchain platform for sending and receiving transactions anonymously. According to Elliptic, a blockchain analysis company, more than $7 billion in crypto has been transferred via Tornado Cash since its debut. The company says around 25% of the funds are proceeds of illegal activities.
What are Coin Mixers?
Coin mixers are protocols that let users hide the destination and origin of transactions. Users deposit crypto in the platform, which is then mixed with other tokens or coins. After that, users can send the mixed tokens to their recipients, obscuring the connection between the receiver and the sender.
How Do Coin Mixers Like Tornado Cash Work?
Before Tornado Cash was sanctioned, it utilized smart contracts to allow users to deposit crypto from one address and withdraw from a completely different address. Most coin mixers operate in the same way. The smart contracts usually work as a pool, mixing all the deposited coins together. And when a user withdraws the funds from those pools, the link between the origin and destination gets broken, hiding the transaction.
With Tornado Cash, users are required to connect their wallets to the protocol, select a network and then choose to deposit or withdraw. Tokens eligible for deposit include DAI, ETH, USDC, cDAI, WBTC, and USDT. Supported networks include Binance Smart Chain, Ethereum, and Polygon.
When making a deposit, a private note is generated by Tornado Cash which will be needed to withdraw funds. After the user confirms they have backed up that note, they can proceed to send their funds to the protocol’s pool.
When the funds are ready for withdrawal, the user provides a receiver’s address and enters the private note they backed up when depositing. The note serves as the user’s private key. After entering those details, the user can then approve the withdrawal.
Tornado Cash adopts the zk-SNARK (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge) technology to confirm and allow transactions.
Furthermore, it is worth noting that coin mixers are non-custodial. That is, there is no external control of the funds or the wallets.
Legal Use Cases of Coin Mixers
Let’s say you wish to make a donation to a charity group, and you do not want it to be tracked back to you, so you use a coin mixer. You only have to deposit the amount of crypto you want to donate to the coin mixer’s pool. Then, after it has been mixed, you go to the withdrawal tab, paste the recipient’s address, and your donation is sent from the mixer, essentially hiding the source of the funds.
Illegal use Cases of Coin Mixers
Cybercriminals are using coin mixers to launder money generated from illicit activity. According to an Elliptic report, about $1.5 billion in crypto has been laundered in Tornado Cash since its inception, with $103 million of these funds having been stolen by Lazarus group from Horizon Harmony Bridge last June.