This allows users to create trusted atomic swaps between the two cryptocurrencies without having to route through a centralized exchange service.
Monero’s data protection mechanisms
The Monero ring signature system creates anonymity from a minimal ring size. Recipients are protected by stealth addresses and funds within the ring cannot be distinguished from one another. The minimum ring size is 11: if no other information is available, an attacker can identify the source of a transaction with a confidence level of 1/11 unless a larger ring size is used.
While Monero transactions are far more private than Bitcoin (the latter doesn’t have a native transaction cloaking system), it’s not foolproof.
The likelihood of being tracked down can be reduced exponentially by creating “churn” transactions, which means moving funds from one wallet to another before they are spent, lowering an attacker’s chance to 1/121, but this one Method is rarely used.
Researchers estimate that by flooding the Monero blockchain with inexpensive transactions (and thus entering many rings to eliminate participants), up to 47.63% of all XMR transactions can be deanonymized.
The Effects of Atomic Swaps
Bitcoins obtained through high profile hacks can be difficult to launder because exchanges and chain analysis groups are constantly monitoring them.
Since each bitcoin can be traced back to the origin of the block reward, they can usually be “tagged”: shuffling them is a tedious process when it comes to large amounts.
It’s also worth noting that the vast majority of bitcoins never enter a mixed pool; therefore, mixers usually spit out spoiled coins in some form anyway, in contrast to Monero, where every single transaction and therefore every single coin is constantly mixed.
In most of the cases, people who want to convert BTC to XMR will have to use a central service that will log their information (IP address, transaction history, etc.).
With the advent of on-chain atom swaps, users can switch between currencies without providing this information. This will greatly improve user privacy, as people who want to mix bitcoins can route through Monero, and those who want to liquidate XMR can get bitcoins without leaving any information trail leading to their identity.
Target for governments
While this development is a big leap forward for cryptocurrency privacy, it is likely to become a target for both governments and decentralized technology skeptics.
Cryptocurrencies, especially XMR, are the only payment method for dark web marketplaces: and while contraband is nothing new, the existence of cryptocurrencies has led to new attack vectors such as advanced ransomware attacks.
It is very likely that governments around the world are using criminals (who make up a small minority of transactions) as scapegoats to condemn / restrict cryptocurrencies as cross-chain privacy improves.
This would likely manifest itself as a crackdown on Fiat offramps. For governments like the United States, desperate to increase tax revenues, shielding citizens’ financial records is not ideal because it worsens their bottom line with rising tax evasion rates.
Mixing rates are still low as virtually no mainstream Bitcoin wallets include a native mix (other than Wasabi wallet) – this could help keep XMR atom swaps under the radar for some time.
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