Bitcoin & Data Science
Bitcoin is not an inherently private system. Instead, it is pseudonymous. All transaction history is recorded on the blockchain and can be viewed publicly by any node on the network. In theory, the identity of users is not known, only a random public key of a Bitcoin address is known. However in practice, large exchanges and Bitcoin businesses have to implement Know Your Customer (KYC) practices to comply with government regulation, so they know the person behind the address.
This becomes very problematic if the exchange experiences a data leak or acts in bad faith. In fact there are companies such as Chainalysis and Elliptic which are specifically dedicated using digital surveillance techniques to try to connect Bitcoin addresses and transaction history with actual users. One of the major tools to fight against this is what is known as a Coinjoin.
“CoinJoin is a Bitcoin transaction where multiple users combine their UTXO (Unspent Transaction Outputs) into one large transaction with multiple inputs and multiple outputs. A traditional Bitcoin transaction is usually composed of one sender and one recipient. It is easy to understand, even by an external observer, which inputs correspond to which outputs and vice versa. The purpose of a CoinJoin transaction composed by multiple inputs and outputs is to break blockchain surveillance heuristics.” — Wasabi Wallet
Here, we can see the overall number of Bitcoin Coinjoins has been increasing as the main implementations — Wasabi, Samourai, and JoinMarket — are developed and gain adoption.
We hope to see this trend continue into 2021. The more Coinjoin activity there is overall on the network, the more it helps the privacy of ‘regular’ transactions in the process. Statistically, Coinjoins are still a very small percentage of total network activity, but adoption is slowly spreading among dedicated Bitcoin and privacy advocates.