What are tainted coins exactly?

Question

I've come across the term of a tainted coin several times now. I understand that coins, or better, the origin of a coin can be traced throughout the blockchain.

I've read that bitcoins can be disassociated from an address, by sending it to a sufficiently large enough wallet which handles many transactions, thus making a transactions origin "untraceable".

This collides with my understanding of the blockchain, where each transaction can be tracked back to its origin.

What does the concept of a tainted coin mean in this context and how can a coins taint be measured?

Answer 1

When you send coins to a large shared wallet, chances are that the coins you withdraw won't be the same as the ones you deposited. That's how you can sever the taint trail.

The key is that the wallet must not only be large, but also shared between a lot of users.

The taint on the original coins would never go away but could be diluted by mixing them with "clean" coins. For example, if you sent two coins, one tainted, one clean in the same transaction they would "mix" together and both would have 50% taint.

The concept of "mixing" has therefore two different meanings : swapping tainted coins for clean ones and mixing tainted coins with clean ones in order to "dilute" the taint.

Remember that the "taint" is always relative to some origin, it's not something absolute.

Answer 2

You can trace the coin back to its origin, the question is whether that information is meaningful.

Say I steal 50 bitcoin. I can pass them around between several different Bitcoin accounts, all min, and you can trace them. The problem is, you don't know whether any of those transactions are real.

Say Jack has 50 bitcoins that come from a block reward and are untainted. Now, say Jack and I both deposit our 50 bitcoins in a web-based wallet. And say Jack withdraws his 50 bitcoins from that web-based wallet and he gets my 50 bitcoins.

Jack now has 50 bitcoins that you can trace to a theft and are therefore tainted. But Jack has done nothing wrong and it doesn't do any good to be able to track his bitcoins because I, the bad guy, now have untainted bitcoins.

Answer 3

The other answers are correct, in that a mixed wallet can be used to hide tainted coins. However they miss an important point: the operator of the wallet service does have the knowledge required to trace the outbound transaction back to the original input coins, because both flows have to be associated with the wallet's internal representation of a customer account.

Good wallet services will refuse give out this information, but they are still vulnerable to being forced to reveal it, e.g. by a legal subpoena or hacking. Therefore somebody who is really serious about washing his bitcoins will need to route transactions through a series of wallets operated in different jurisdictions, on the theory that it would be impossible to subpoena or hack every wallet in the chain.