What Are Coin Mixers and How Do They Work?

The Treasury Department has issued sanctions against Tornado Cash, an Ethereum coin mixing service, effectively banning Americans from using it. But what does Tornando Cash do, and more broadly, why would anyone want to use coin mixers? In this article, we’ll examine the technology behind mixers and their legitimate and illegitimate uses.

Launched in 2019, Tornado Cash is a blockchain protocol for sending and receiving anonymous transactions.

According to blockchain analysis firm, Elliptic, over $7 billion in cryptocurrency have gone through Tornado Cash since its launch, with around 20% of those funds tied to illicit activity.

What is a coin mixer, and why use them?

A coin mixer is a service that allows users to obfuscate the origin and destination of transactions. Users send cryptocurrency to the service, have that crypto mixed with other coins or tokens, and then send the equivalent amount of “mixed” coins to a recipient address, hiding the connection between the sender and recipient.

There are many legitimate uses for this kind of service. Just as you may not want your employer to know the intimate details of every bank or credit card transaction that you’ve ever made, you may also not want your employer—or anyone else, for that matter—to know every detail of every crypto transaction you’ve ever made either.

But as the adoption of crypto and blockchain tools grows, real-world identities are becoming increasingly linked to blockchain addresses—with every purchase, transfer, or interaction associated with those addresses laid bare on a public, transparent, distributed ledger. And that’s where coin mixers come in.

But this also makes coin mixers an attractive tool for cybercriminals, and thus a target for law enforcement. While politicians and law enforcement have railed against the use of cryptocurrency in criminal enterprises, coin mixers occupy a gray area between facilitating money laundering and preserving the right to privacy. Because of blockchain’s permissionless and transparent nature, some crypto users rely on the added privacy that coin mixers provide.

Privacy advocates argue that coin mixers are especially useful, even necessary, in cases where a person’s activities—like journalism, civil disobedience, and protest—can put that person at risk. Because of this, they require greater privacy in their crypto transactions.

On the other hand, law enforcement and government agencies see coin mixers as a way for criminals to launder money using cryptocurrency and services like Tornado Cash to obscure where the funds originated.

In its announcement of the sanctions against Tornado Cash, the Treasury Department said that criminals had used Tornado Cash to launder money, saying the service processed more than $7 billion worth of virtual currency since its creation in 2019. According to Elliptic, only $1.5 billion of that figure was connected to illicit activity.

Of those funds, the Treasury said, are the combined $103.8 million stolen in June from the Horizon Harmony Bridge by the Lazarus Group, a North Korean state-sponsored cybercriminal group, and from the Nomad Token Bridge in August.

How do Coin Mixers like Tornado Cash work?

Before Tornado Cash was taken down, it used smart contracts to accept token deposits from one address and enable their withdrawal from a different address. Other coin mixers operate in a similar same way. These smart contracts work as a pool where all the deposited tokens get mixed together. When funds are withdrawn from those pools, the on-chain link between the source and the destination is broken, anonymizing the transaction.

With Tornado Cash, a user would connect a wallet to the platform—either Metamask or Walletconnect—selecting a network and choosing to deposit or withdraw. For deposits, the token options were ETH, DAI, cDAI, USDC, USDT, and WBTC.

Network options include Ethereum, Binance Smart Chain, Polygon, and Ethereum Goerli (a test network).

After selecting a deposit, Tornado Cash generates a private note that users would later need to withdraw their funds.

After confirming that the user has backed up the note, they can continue and send the deposit to the Tornado Cash pool.

When ready to withdraw from the Tornado Cash pool, the user provides a recipient address. The platform requires the user to paste the private note generated by Tornado Cash, which acts as the user’s private key. After the user selects withdraw, a proof is generated, after which the user can confirm the withdrawal.

Tornado Cash uses Zero-Knowledge Succinct Non-Interactive Argument of Knowledge (also called zk-SNARK) to verify and allow transactions.

These kinds of coin mixers are typically non-custodial, meaning there is no third-party control of the wallet and funds, simply the creation of the smart contracts. Because these services use no intermediary, they are reliably neutral—but that also means they can be a tempting tool for cybercriminals looking to launder stolen crypto, as in the case of Larazus Group.

What are other legitimate use cases?

Let’s say there’s a business owner and crypto enthusiast named Robert who wants to send Ethereum to a hacktivist group operating out of Ukraine. Robert doesn’t want his donation to be traced back to him, so he uses a coin mixer.

Robert goes to the coin mixer website and deposits the Ethereum he wants to donate. The sent amount is deposited into the mixer’s smart contract and pooled with the other hundred, thousands, or even millions of transactions already in its pool. After receiving confirmation that the deposit was successful, Robert goes to the withdraw tab, enters the recipient’s address into the mixer, and sends the Ethereum from the mixer.

The Ethereum is then sent from the mixing to the recipient. On the receiving end, the address shown is that of the mixer and not the original sender’s address, anonymizing the transaction.

If this hypothetical scenario sounds familiar, it’s based on a tweet from Ethereum co-founder Vitalik Buterin, posted after the Treasury Department sanctioned Tornado Cash.

As Lia Holland, Campaigns & Communications Director at Fight for the Future, wrote, “Let us be clear, hackers and cybercriminals, as well as those that support them, are deplorable and should be stopped—but not in a way that compromises human rights and the first amendment.”