With the recent media frenzy surrounding the trial of Ross Ulbricht, it has become apparent to everyone that Bitcoin is not as anonymous as was previously assumed. The Bitcoin system was designed for users to have the ability to move funds on the Bitcoin blockchain without having to be associated with any particular account. While this may provide a layer of anonymity, every transaction on the blockchain is publicly viewable. The public nature of the blockchain allows third parties to perform various kinds of statistical analysis and data mining techniques that can expose relationships between certain Bitcoin addresses and thus yield meaningful intelligence about the possible owners of certain address and the flow of funds in between them.
This is where “tumbling” services such as Bitcoin Fog come into the picture. Bitcoin Fog came into existence on October 27th 2011 and it’s sole purpose is to make any kind of statistical blockchain analysis very difficult. Bitcoin Fog brands itself as security blanket for the cryptocurrency citizen and protecting individuals from the prying eyes of the authorities and other malicious actors. One of the main methods of blockchain analysis is to keep track of the amounts that are flowing in between address and the frequency of the transactions. Bitcoin Fog’s primary method of obscuration is to pool funds incoming from different users into one wallet and release each user’s Bitcoins over time using randomly generated amounts. These randomly generated amounts can also be spread out over predefined time intervals, this adds another variable that renders statistical analysis attempts ever more problematic. These types of clever tricks make it extremely difficult for a third party to draw any meaningful intelligence about specific Bitcoin addresses.
Using tumbling services such as the ones provided by Bitcoin Fog is not without it’s risks, and there are many. How can a user of such services be reassured that the tumbler will not just steal their Bitcoin? What happens if the server the tumbler is running on has a catastrophic hardware failure and all of the Bitcoin is lost? Bitcoin tumblers store large number of user’s funds for extended periods of time just like exchanges, that makes them a very enticing mark for hackers. Bitcoin Fog recommends that any user trying to tumble their Bitcoins does so over a weekly time-frame at minimum to make sure maximum obfuscation, so there is plenty of time for just about anything you can imagine to go wrong. Bitcoin Fog currently runs on the TOR network and that does give it an extra layer of security, but considering that the Silk Road drug marketplace was also hiding behind TOR, well, everyone knows that unfortunate story.
If Bitcoin officially becomes regulated and accepted into mainstream society, tumbling services like the one provided by Bitcoin Fog will be outlawed at the drop of a hat. Allowing Bitcoin tumbling to take place would be the equivalent of traditional money laundering being allowed and everyone knows the authorities will not turn a blind eye to such a blatant violation. It can be argued that tumbling may have legitimate uses, privacy of financial affairs, bypassing laws that violate individual liberties without fearing retaliation from any state authority and corporate/government whistle-blowing. It is also true that tumblers provide the perfect venue for cyber criminals to launder their ill gotten gains. How the Bitcoin community deals with tumblers remain to be seen, due to the nature of the Bitcoin system there is no way to prevent tumblers being used for only legitimate purposes, in this case both good and bad seem to go together.
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