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A crypto mixer is a service (centralized/decentralized) that mixes identifiable cryptocurrency with others, thus increasing the anonymity of certain cryptocurrency transactions.
This is mainly done by people who want to keep their cryptocurrency transactions private. This service is often used to anonymize fund transfers between services and does not need to Know Your Customer (KYC) checks.
Users deposit crypto into a smart contract developed to complete the mixing transaction from one address. After a fixed period, the users withdraw the earlier deposited tokens from a separate address. The specifics of the mixing process are unique for every crypto mixer, and users can easily verify or confirm the crypto that was deposited through several cryptographic methods – that differ from protocol to protocol.
These days an increased usage of this software tool is seen in money laundering activities.
There are two types of mixers, namely centralized and decentralized mixers. For instance, companies that accept Bitcoin and send back different BTC for a fee are called centralized mixers. Decentralized mixers employ protocols to obscure transactions utilizing an entirely coordinated or peer-to-peer (P2P) method.
There are allegations that mixers are facilitating money laundering and criminal activities across sectors. Sanctions have been enforced against several of the highest providers of this service, with OFAC designating a smart contract, usually reserved for nation-states. As the misuse of crypto mixers continues to rise, this will result in further regulatory actions against the operations of these protocols and the investors leveraging them.
Other types of mixers include obfuscation-based or decoy-based mixers and zero-knowledge-based mixers. Obfuscation-based mixers use ways to hide a user’s transaction graph. On the other side, zero-knowledge-based mixers depend strongly on advanced cryptographic methods such as zero-knowledge proofs to completely delete the transaction graph.
The two categories of cryptocurrency mixing services include Custodial mixing and noncustodial mixers.
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