Recently it seems as if the Ethereum network has been processing more transactions than Bitcoin. However, it seems as if the bulk of these transactions are being done by one large mixer that trys to hide where the funds are going. It does seem, however, that it may just be quite mundane.
Originally developed for Ethereum smart contract technology, the token has been looked at as a rather safe and secure way to transact. This is in contrast to Bitcoin that has taken on more of the darknet. However, this has changed recently with a lot of the ICOs that have been taking place. Transaction mixers are not generally for those people who have nothing to hide. This has led many to believe that these Ethereuem mixers are being used for nefarious purposes.
Yet, before we start to judge something before it is clear, let us take a look at some analysis.
What are these Addresses
Researchers decided to take a look at all of the Ethereum transactions that have taken place in the genesis block up till the 16th of September 2017. In order to be able to cluster the numerous addresses, they looked for patterns in the transactions that would indicate that these addresses were indeed related in somehow.
This analysis resulted in a really interesting finding. There appear to be a large amount of Ethereum “throwaway” addresses at the center of the transaction pool. They were used only to receive money for certain transactions, send that money and were then never used again. These addresses constituted over 46% of all of the active addresses and at least 65% of all of the transactions on the network. This is no doubt quite a staggering number.
Although this may sound a bit alarming, you should consider that this may be spoof able. According to Vitalik Buterin, the Ethereum founder, someone could easily send a large amount of ETH between them on a number of these addresses and it will create similar type volumes. This would be hard to completely place a finger on.
Similary, looking at another metric which is more reasonable is the daily volume on the transactions. The total number of daily transactions with the mixer is about 10% only. Although this is indeed quite a considerable number, it is not as relevant as was initially thought. Could there be a more innocent explanation for these transactions?
Use by the exchanges
However, if the researchers were able to identify where the coins were coming from then they would also be able to spot where they were going as well.
Most of the transactions were coming from addresses at 6 different exchanges. From the wallets on these exchanges, the 31m ETH is sent from into this mixing pool. They are then transacted 80 different times within the mixing pool. Once complete, these are then sent out to addresses at the exchanges. The core of this transaction mixer is a massive shell which consists of a number of temporary and permanent addresses. In terms of the throwaway addresses, they transact about between 500 to 10,000 ether.
We can also see that the amount of transactions completed by the mixer has grown considerably over the past few months. There was quite a bit of testing on the mixer in late 2015 through 2016. Then, in late 2016 it appears as if this is when the mixer started to do most of the transacting.
The researchers were able to spot some sort of a pattern with the mixer. For example, after being active for a certain period of time and receiving around 1,000 ETH, these addresses became inactive and another set of addresses would step in to receive another set of transaction of sizes of 4,000 ETH for example. This make it looks as if there is indeed some sort of a system behind these transactions.
Is this Money Laundering?
The researchers have termed this a mixer as that is what it does. It will mix the coins so that it is hard for people to spot where they have come from. When most people think of mixers, they are inclined to think of Money laundering activity. This is unfortunately a bad characterization as mixing Ether would be different to mixing Bitcoin for example. They are not inherently a private currency so it is easy for people to hide their identity.
Hence, the researchers were open to other explanations of what they mixer was used for. One of the explanations could be that the exchanges are trying to mix their clients’ funds so that when they withdraw they get access to only clean funds. This will ensure that if there was anyone who funded with illicit means, it would not incriminate any of their users on the other end.
Another explanation could be that the exchanges want to protect their citizens from government snooping of other countries. Or, the mixer could be used by the exchanges as a method of making sure that the transactions between them are secure and cannot be easily tracked by those involved in Cybercrime. Yet, the original suspicion of a giant criminal money laundering ring could also be a possibility.
They point to the fact that a number of hacked addresses have ended up in this mixer. However, this would also be the result of money naturally moving from an address that has been hacked.
A Simple Explanation
However, many Ethereum users on Reddit think that there is one culprit and that is Coinbase or GDAX. If you look at the graph of the exchanges, Coinbase is missing which could mean that this is all Coinbase that is mixing their coins at the other exchanges.
Therefore, the exact nature of these transactions is most likely to be a simple business decision by Coinbase and not a vast criminal conspiracy. This of course does show the extent to which security researchers are able to do analysis on the Ethereum blockchain and spot suspicious activity.