The cloudy world of cryptocurrency mixers: Into the storm

The user base of Tornado Cash, which is authorised by OFAC, is being contested by a number of obfuscation protocols.

The cloudy world of cryptocurrency mixers Into the storm

The topic of cryptocurrency mixing services is contentious within the sector. Some support these protocols’ privacy-enabling qualities, while others claim that their primary use is for nefarious purposes.

The general conclusion for platforms like Tornado Cash is “guilty as charged.” In August 2022, the infamous decentralised mixing protocol was approved by the US Office of Foreign Assets Control (OFAC), effectively making use of the service unlawful.

The controversy surrounding Tornado Cash continues, and one of its creators, Alexey Pertsev, is controversially still being held in prison in the Netherlands as prosecutors try to establish a case against the Russian developer and his alleged involvement in the running of the mixer.

According to a report from blockchain analytics company Elliptic, cryptocurrency mixers appear to be a case of the adage “one man’s loss is another man’s gain.”

A setback for money-laundering schemes

According to Elliptic’s investigation, Tornado Cash handled more than $7 billion worth of cryptocurrency. With the North Korean Lazarus Group state hackers among its user base, the network was used to launder an estimated $1.54 billion in illicit cryptocurrencies.

Following OFAC’s penalties, holdings in Tornado Cash liquidity pools decreased by 60%, which is reported to have significantly impacted the platform’s ability to provide anonymity for large-scale money laundering operations.

Numerous substitute mixing services have been noted as potential hazards to bitcoin service providers and law enforcement now that Tornado Cash has apparently been shut down. Elliptic lists six distinct protocols that have been employed as mixers after Tornado Cash was outlawed.

Not all mixers are employed for illegal purposes.

The paper from Elliptic explains how these mixing protocols function in various ways and offer a range of results for potential customers. The amount of bitcoin combined by various obfuscation algorithms is over $41 million, which is a small fraction of the total processed by Tornado Cash, according to a top-down view.

Given their usefulness in decentralised finance, Ether ETH, BNB, Wrapped Ether (wETH), and Tether are the most frequently combined tokens (DeFi). Notably absent from Elliptic’s statistics are Polygon-based tokens.

Three-quarters of the cryptocurrency mixed is made up of two specific protocols, which have the maximum mixing capacity among the instruments evaluated.

The first is Railgun, a decentralised protocol aimed at professional traders and DeFi users wishing to hide investment techniques, according to Elliptic. Using zero-knowledge-proof technology, Railgun Privacy System eliminates wallet addresses from transactions on open blockchains. It asserts to be ERC-20 compliant and to have no mixing restrictions.

The second protocol, Cyclone Protocol, is a fork of Tornado Cash that boasts a number of improvements, including yield farming for contributors to anonymity pools.

According to Elliptic, Cyclone is available on IoTEX, Ethereum, BNB Smart Chain, and Polygon and can combine 100 ETH and 100,000 USDT in a single instance.

The funds being mixed by these services “mostly reflect legal DeFi trade activity,” Elliptic notes in its study, with the exception of Cyclone, which it identifies as the protocol with the biggest risk among the six.

Only $40,000 of mixed funds could be linked to DeFi thefts, indicating that bad actors and criminal elements are not currently using these alternate mixing techniques.

Being attentive

Even though malicious actors have combined a very modest quantity of cryptocurrency, Elliptic nonetheless issues a warning to some of the services it highlighted.

Following the Tornado Cash sanctions, Cyclone Protocol is considered to be the service with the highest risk. Elliptic expresses concern about the service’s high transaction limit, the amount of liquidity available in its mixing pools, and its capacity to handle Tornado Cash’s eponymous governance token (TORN): “It’s confirmed use to launder at least some proceeds of DeFi exploits, the amount of funds it has since processed, and the apparent absence of its developer team to address concerns only strengthen these risks.”

The danger level for Buccaneer V3 (BV3) was rated as “medium-high”. Users can “bury” funds for an unlimited amount of time using the Ethereum-based token (BUCC) without needing to mix, pool, or cycle transactions. As an obfuscation method, a decoy mode presents fake BUCC balances on user interfaces.

Due to the service’s utilisation of the Gas Station Network to pay transaction fees by asserting a small amount of transmitted BUCC, it may be appealing for illegal use situations. By doing this, consumers might be able to avoid using cryptocurrency exchanges and services that adhere to regulations:

“BV3 thus claims that it solves the ‘financing dilemma,’ which tackles the issue of normally needing to acquire ETH through a centralised KYC exchange to pay transaction fees.”

Elliptic warns that BV3 employs technology that is currently in testing and whose features and capabilities have not yet been completely realised. Elliptic thinks that the remaining four protocols have elements that will prevent widespread unlawful use.

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