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Why Centralized Exchanges are Transforming into Crypto Mixers

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When it comes to achieving privacy in the crypto world, centralized exchanges are becoming the go-to option for many users. This may seem contrary to the idea of decentralization being the ideal choice for privacy, but there are several reasons why centralized exchanges are turning into crypto mixers.

One of the common misconceptions about crypto is that it offers complete anonymity. The belief is that by going fully decentralized, users can conduct financial transactions without leaving a trace. However, the reality is that most decentralized blockchains provide pseudonymity, not anonymity. This means that while users can create decentralized wallets and transact on different blockchain networks without sharing personal information, their transaction history is still visible on the blockchain.

Each transaction leaves an immutable mark on the blockchain, including wallet address information. This means that anyone on the receiving end of a transaction can see the wallet address of the sender or receiver. Once a wallet address is associated with a user, their entire transaction history across different networks becomes visible. This lack of privacy is a major concern for many users, with a recent survey revealing that 84% of respondents worry about their wallet addresses being linked to their identities.

Workarounds for Pseudonymity

While the transparency of transaction history may not be a big issue for individuals, it can be problematic for businesses. For example, a company with multiple vendors expecting monthly crypto payments may not want to reveal the discounts given to each vendor. To maintain privacy, the company would need to create separate crypto wallets for each vendor and ensure that the right wallet is used for each payment. While this workaround requires some extra steps, it helps protect sensitive business information from unauthorized eyes.

Practical-but-Centralized Privacy

For many users, the practical solution to maintaining privacy in the decentralized world is to pay directly from a centralized exchange like Kraken or Coinbase. This eliminates the need for complex workarounds and provides the practical privacy that most crypto users desire. When paying from an exchange, the recipient only sees that the payment comes from an exchange, while the rest of the internet sees it as just another transaction from an exchange. This is why centralized exchanges have inadvertently become the most commonly used mixers, as they protect users’ payment histories from being revealed to business partners, competitors, and others.

However, the crypto industry needs to strive for better privacy without sacrificing decentralization. Zero-knowledge cryptography is emerging as a promising alternative. Zero-knowledge proofs allow users to verify transactions or identities without disclosing any additional information. With recent developments, generating proofs can now be done on web browsers or smartphones. To truly replace traditional finance, crypto needs to provide the same level of privacy as traditional infrastructures. Businesses are unlikely to transition to crypto if their entire transaction history is visible to the public. In a world where users manage assets across multiple blockchains and prioritize privacy, the crypto ecosystem must pay attention to and address these needs.

About the Author

Awa Sun Yin is a co-founder of Anoma & Namada and a director at Heliax. She has extensive experience in the crypto industry, having worked as a data scientist and software engineer at Chainalysis and contributed to initiatives in the Ethereum community. Awa is passionate about privacy and has played a key role in building innovative ventures in the crypto space.

Please note that the views and opinions expressed in this article are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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