18th April 2024 > > Mixers & privacy.

tl;dr

Crypto mixers, and our competing needs for privacy, a basic inalienable human right.

Market Snap

Market Wrap

GBTC outflows have dominated the inflows to BlackRock all week. Ark has seen net outflows on two consecutive days, which is unfortunate for Cathy, and us too as a sense of impending doom descends upon crypto prices. There is very clear outperformance by stocks this week, but no PM wants a correlated portfolio.

Curious Cryptos’ Commentary – Crypto mixers & Railgun

Crypto mixers are back in the headlines, for all the wrong reasons of course.

For those unfamiliar with mixers, the concept is that crypto owners send cryptos into the mixer, and receive back the same amount (minus a fee, there is always a fee to pay) into a new wallet. The longer the time period between the return of the coins, and the greater the total volume processed by the mixer, the greater the difficulty of tracing the source of those coins.

One can immediately see that such a facility could be used for nefarious purposes. All proceeds from illegal dark net sites must now surely go through a mixer, as does much of the cryptos stolen in hacks. Though interestingly not all.

Some hackers have been stupid enough to transfer cryptos straight from the hacks into their KYC-ed central cryptocurrency exchange wallet, making it a simple matter to freeze those funds, and bring down the full weight of law enforcement on the hacker. It seems as though Dread Pirate Roberts, creator of the legendary Silk Road marketplace, appears to have also made this same mistake over a decade ago now.

But the argument that because mixers can be used in bad ways and so should be banned (a stance currently taken by the US government in its court actions against the creators of Tornado Cash) applies equally to fiat currencies, bank accounts, weapons, anaesthetic drugs, aspirin, alcohol, planes, trains, automobiles, books, libraries, schools, supermarkets, churches, mosques, nightclubs. I could go on. We would have precisely nothing left in life, not even rocks to try to safeguard our families from the marauders who would ignore the rules.

…

It has been alleged that Railgun has been used by North Korean hacking group Lazarus – mission statement: “Bring misery to the world” – to launder its ill-gotten gains to further the nihilistic aims of Kim Jong-Un, a man who tries very hard every single day of his sadly deluded life to raise his personal standing in the ranks of all-time greatest arsehole.

Railgun takes its obligations seriously, for it has incorporated the concept of Privacy Pools.

…

A recent paper by crypto OG Vitalik Buterin is the first attempt at a comprehensive means of proving regulatory compliance (or otherwise) across all blockchain transactions with the creation of Privacy Pools:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4563364

I am not going to pretend for one minute that I have read, let alone understood, any of the maths behind how Privacy Pools work. The abstract tells us enough for our needs:

“In this paper we study Privacy Pools, a novel smart contract-based privacy-enhancing protocol. We discuss the pros and cons of this protocol, and show how it could be employed to create a separating equilibrium between honest and dishonest users. The core idea of the proposal is to allow users to publish a zero-knowledge proof, demonstrating that their funds (do not) originate from known (un-)lawful sources, without publicly revealing their entire transaction graph. This is achieved by proving membership in custom association sets that satisfy certain properties, required by regulation or social consensus. The proposal may be a first step towards a future where people could prove regulatory compliance without having to reveal their entire transaction history.”

This is the right approach. Banning stuff never works. Just ask the creator of Silk Road 2.0.

Curious Cryptos’ Commentary – Privacy

The alternative is a dystopian world of CBDCs, beloved by tyrants.