CoinJoin – What is the CoinJoin Protocol and How Does It Work?

Beginner’s Guide / 16.02.2021

The CoinJoin protocol enables a trustless bundling of Bitcoin transactions. The goal of this technique is to provide an extra layer of privacy to users. Notably, CoinJoin transactions are not impossible to decipher using current statistical analysis tools and correlation techniques, but they are far more expensive and difficult to track.

Many years ago, most Bitcoin users believed that the network provided anonymity. You don’t register your name when you open a Bitcoin wallet, but there are still digital footprints that could be traced back to you, such as your computer’s IP address. Compounding this privacy risk is the fact that Bitcoin transactions are immutable and remain on the blockchain indefinitely. 

Over the last five years, there has been considerable effort put forth in the fields of blockchain forensics. Much of these programs and platforms have received funding from governments keen to audit unclaimed crypto earnings. CoinJoin is a cost-effective way to obfuscate your transactions further and ensure that only well-funded snoops have the resources to figure out your identity.

Benefits of CoinJoin

CoinJoin’s anonymization strategy brings a lot of benefits to the market. The added privacy one gains from bundling these transactions make it increasingly more difficult for outside viewers to identify where a payment originated from and where it was sent. Best of all, CoinJoin doesn’t require any changes to the underlying Bitcoin protocol.

Security

CoinJoin’s unique strategy ensures that your coins are never at risk of theft. This approach is in stark contrast to other coin mixing protocols that require you to place trust in a third-party. Third-party mixing platforms create another attack vector for those seeking to discover your Bitcoin’s past. 

Cost

Another considerable benefit of CoinJoin transactions is that they are cheaper than traditional Bitcoin transactions. Since these mixed transactions are only signed after the script is deemed valid, it defrays a transaction’s cost. Additionally, since CoinJoin combines multiple transactions into one singular action, you only pay one transaction fee.

Scalability

CoinJoin also helps alleviate some of the congestion issues facing Bitcoin’s network. CoinJoin transactions take up less space than two separate transactions. Consequently, it allows Bitcoin to support more transactions and network usage.

Fungibility

One of the most important roles of CoinJoin in the market is to help retain Bitcoin’s fungibility. Fungibility is the term used to describe the ability of a currency to be interchanged. For example, gold is fungible. Any two pieces of gold that are the same grade and weight hold the same value. 

Sadly, increased forensics of Bitcoin transactions threatens to eliminate fungibility within the network. If governments can track and ban specific Bitcoin from use, the entire network will suffer.  When a user employs CoinJoin, tracking the IP addresses or blacklisting transactions is far more complicated. 

How Does CoinJoin Work?

CoinJoin utilizes a coin shuffling protocol. The system is built to combine transactions and create a multi-party Bitcoin transaction. The protocol will mix multiple input signatures and outputs before a transaction takes place to accomplish this task. This approach makes a new combined UTXO. 

In essence, CoinJoin takes the primary method of multisig transactions and introduces a bit more flexibility. The system will require that each transaction signature is completely independent of the other signature. As such, multiple digital signatures are needed for the transaction to be approved. 

CoinJoin transactions are not valid and will not be accepted by the network until all signatures for the multisig are provided. This system was designed to reach a consensus on inputs and outputs with a delayed merging of signatures. In this way, it ensures that no transaction will be identical.

History of CoinJoin

The CoinJoin concept has been around for a long time now. The original concept came to light back in 2013. At this time, Bitcoin Core developer, Gregory Maxwell, posted the idea to a BitcoinTalk thread focused on such actions. Since then, CoinJoin has found usage across a multitude of blockchain-based systems.

How To Get CoinJoin

It’s easy to find platforms that support CoinJoin nowadays. One of the easiest ways to employ this powerful anonymizing system is via the Wasabi wallet. This next-gen Bitcoin wallet provides users with a non-custodial, open-source, desktop Bitcoin wallet to keep their identity safer. 

Wasabi differs from your everyday Bitcoin wallet because it mixes coins on all wallet users. Impressively, Wasabi furthers CoinJoin’s effectiveness through its trustless coin shuffling feature. Specifically, the wallet is anonymously operated with Tor and the Bitcoin P2P network.

Samurai

The Samurai wallet is another popular option in the market that offers direct CoinJoin integration. Samurai adds some other cool features like stealth mode to protect your digital assets. When activated, Stealth mode will hide the wallet’s icon on your phone. This option is unique to the Samurai wallet and provides you with security if your phone is lost or stolen. 

DASH

One cryptocurrency that employs CoinJoin directly into its core protocols is Dash. Dash entered the market as a private coin but recently has pivoted away from this sector and now focuses on creating an easy-to-use and globally supported decentralized financial solution. However, the network still offers CoinJoin features via its PrivateSend function. Notably, DASH was one of the first coins to integrate CoinJoin directly into its features.

CoinJoin – An Extra Layer of Protection that Continues to Be a Popular Option

Even though CoinJoin is no longer completely anonymous, it’s still a great way to add more security to your crypto transactions. When you employ this protocol, you ensure that only those researchers with ample funding and resources can unravel your transactions. As such, it’s still a valuable and highly recommended way to secure your Bitcoin from prying eyes. 

David Hamilton aka DavidtheWriter is a long time Bitcoinist and cryptocurrency journalist. Currently, he has over a thousand articles published on blockchain technology. His expertise and experience makes him one of the most reputable writers in the sector.