Onion Mixer, the top player in cross-chain mixing protocols

This article is sourced from Deep Chain Technology, authored by Shi Yan, and edited by Men Ren, with operations by Xiao Shitou and Feng Qingyang.

Anonymous transactions have always been a necessity in the industry. From the early dark anonymous systems to the current mixing protocols built on public chains, mixing coins is now presented to traders in a different way. The new generation mixing protocol Onion Mixer is based on CoinJoin and zero-knowledge proofs in its technical model, deeply integrating DeFi incentive models, and supports mixing coins across three chains: ETH, BSC, and Heco.

Can Onion Mixer, which is at the forefront of the industry, maintain its position as the leader in the current mixing protocol sector?

"Transparency and Anonymity"

Even at this stage, cryptocurrencies are still controversial due to their "anonymity." Blockchain is a peer-to-peer distributed network, and if you are a trader in the cryptocurrency field, your code on the blockchain network is a long string of code. The transactions and the feedback between transactions are specifically reflected in the asset transfers between two addresses.

If we look at this string of addresses without connecting it to the outside world, it is indisputable to say that cryptocurrency transactions are anonymous.

In movies, we often see police interrogation rooms fitted with one-way glass, where people inside the room cannot see the outside world through the "dark side" of the glass, while those outside can clearly see every move inside the interrogation room through the "bright side" of the glass. In the blockchain world, blockchain explorers act like this one-way lens.

The blockchain system packages each transaction into blocks and links these blocks in chronological order to form a chain, with each transaction becoming an immutable and verifiable record. This is the root of why blockchain explorers can conduct thorough inquiries into the transactions of every address. Once an address is linked to a person, for example, if your address is tagged after a transaction, then every future transaction you make will be "public." Therefore, while cryptocurrency transactions seem anonymous, they are actually transparent.

The traceability of cryptocurrencies can indeed play a role in combating cryptocurrency crime, but many cryptocurrency holders express concerns about the security of their holdings. After all, no one likes to have their daily transactions exposed to the public, especially since the balance changes of some cryptocurrency whale accounts can always cause a certain level of panic.

With the rise of DeFi, a large influx of funds and users has entered the decentralized world, and transactions between accounts have become exceptionally frequent. The completely transparent environment has further exacerbated investors' concerns about asset security and privacy. How to effectively address the privacy issues of the current blockchain system has become an urgent problem.

"Current State of Mixing Protocols"

In the early days of the industry, some developers had already noticed related issues, leading to the emergence of some established dark anonymous systems, such as DASH, Monero, and Zcash. Although these anonymous systems are theoretically feasible, they do not support smart contracts and are difficult to scale, making them less practical for users despite achieving anonymity, with cumbersome operational steps.

The rise of DeFi has gradually marginalized some blockchain systems that are difficult to support smart contracts, especially the aforementioned anonymous systems that struggle to interact with public chains like Ethereum, Heco, and BSC. As funds continue to flow into these DeFi chains, the previous anonymous ecosystem has become increasingly marginalized, as we need to "transfer" assets to other chains to achieve relative "anonymity."

Moreover, the announcement by well-known compliant trading platforms like Bittrex and Coincheck to delist privacy coins such as XMR, ZEC, and DASH has further worsened the development of established anonymous public chains.

However, the working principles of anonymous coin systems have provided some ideas for subsequent anonymous solutions, such as the zero-knowledge proof of Zcash, which is currently the most feasible anonymous solution. Zero-knowledge proof is a method of verifying results indirectly, thereby improving verification efficiency, and it has a wide range of applications in blockchain technology. Zero-knowledge proof can be intuitively understood through the following example.

A has a key to a room, but B needs to verify whether A's key is the key to that room. He has two ways to verify:

1. A directly opens the door in front of B, proving that the key in his hand is valid (traditional verification method);
2. B describes a unique object in the room, and A takes out that object and presents it to B, indirectly proving that the key in A's hand is valid, and B does not need to verify further, nor does A need to disclose excessive information. This vividly illustrates zero-knowledge proof.

After the rise of DeFi, the characteristics of anonymous systems are more constructed as protocols built on public chain systems, allowing users to directly achieve anonymity of assets on-chain. For example, the currently established anonymous mixing system Tornado Cash based on zero-knowledge proof on Ethereum, and the multi-chain anonymous mixing system Onion Mixer.

For Tornado Cash, it is the first-generation mixing anonymous protocol built on Ethereum based on zero-knowledge proof. From its working principle, users of Tornado Cash who want to anonymously transfer or mix an asset must first transfer the asset to Tornado Cash's smart contract. Tornado Cash will provide the user with a randomly generated secret key, and after a period of time storing the asset in Tornado Cash, the user can submit the previously provided random key to Tornado Cash. After submitting a new address, the smart contract will transfer the asset to the new address and complete the "mixing" of the asset.

Throughout the process, Tornado Cash indirectly and non-interactively completes the above steps without touching the private key.

Although Tornado Cash is theoretically feasible, the Tornado Cash protocol itself lacks incentives. Even though Tornado Cash began issuing incentive tokens last year, its incentive model is inefficient.

In fact, for anonymous protocols, the strength of privacy protection depends on the amount of deposits and liquidity in the anonymous asset pool. Due to the lack of effective incentives, the scale of Tornado Cash's anonymous asset pool grows slowly and is basically stagnant.

Additionally, since Tornado Cash only supports assets on Ethereum, assets on other chains find it difficult to achieve anonymity within this protocol. While we say that the richness and liquidity of assets on Ethereum are good, the limitations of a single chain inevitably lead to bottlenecks in the development of Tornado Cash. More importantly, Tornado Cash also lacks decentralized governance to allow the community to continuously improve.

In summary, while Tornado Cash can achieve corresponding mixing functions for certain assets, it has many drawbacks.

As a second-generation mixing protocol, Onion Mixer is more in line with the current trends of DeFi development.

"Understanding Onion Mixer"

The design philosophy of Onion Mixer better aligns with the current DeFi trends. Onion Mixer integrates both CoinJoin and zero-knowledge proof in its mixing solution, further enhancing the privacy of mixing compared to Tornado Cash, which relies entirely on zero-knowledge proof for its mixing foundation.

From the perspective of CoinJoin itself, its design utilizes the mechanism of Bitcoin UTXO, where a single transaction can have multiple inputs and outputs. CoinJoin constructs a transaction that allows hundreds of transaction initiators (addresses) to break down the transaction amount and finally transfer Bitcoin to hundreds of transaction recipients (addresses), making it difficult for analysts to find addresses that have a strong connection to the monitored target among these hundreds of addresses.

Although CoinJoin itself has issues such as the potential for address leakage and inefficiency, Onion Mixer effectively resolves these issues by constructing a smart contract mixer combined with zero-knowledge proof.

The specific model is:

When a user with a mixing need sends a cryptocurrency asset to the smart contract, the smart contract generates a string of zero-knowledge proof code for that user (equivalent to a transaction voucher, but this voucher does not contain any valid user information).

When the user needs to retrieve assets from the smart contract, they only need to provide the corresponding zero-knowledge proof code and a new address to the contract, and the smart contract will transfer the asset to the new address.

The model of Onion Mixer allows users to obtain the assets after mixing in one go, while Tornado Cash can only obtain part of the assets after mixing at a time. In terms of asset utilization, Onion Mixer is absolutely superior to Tornado Cash.

Although both are mixing protocols and can achieve mixing in their models, the effectiveness of mixing is not only related to the model but also to other factors, such as the liquidity and depth of the mixing pool, etc.

The purpose of mixing is to make it difficult for many so-called "observers" to establish a connection between the addresses before and after mixing.

If a mixing user needs to mix an amount far exceeding the asset quantity in the mixing pool, or if the mixing pool has no other transactions for a long time after the user deposits assets, both scenarios will affect the efficiency and effectiveness of mixing. Therefore, leveraging the momentum of DeFi can effectively solve the above problems, and Onion Mixer has captured this point well.

Onion Mixer also supports multi-chain mixing, currently supporting asset mixing across multiple chains such as ETH, BSC, and Heco, allowing Onion Mixer to acquire richer assets and more users.

"Effective Incentive Mechanism"

From the perspective of DeFi, Onion Mixer’s mixing fully meets the needs of two types of user groups. One group consists of users who frequently navigate DeFi and are eager to profit from DeFi protocols, while the other group seeks to use Onion Mixer for mixing to meet privacy needs.

Overall, the scale of the first group of users is far greater than that of the second group. Therefore, for a protocol, how to effectively incentivize users and enable them to profit is crucial.

Onion Mixer introduces the governance token OMT, where users can earn OMT rewards by participating in transactions, providing liquidity to the fund pool, or holding OMT.

Whether through trading or providing liquidity, users can provide good liquidity and depth for Onion Mixer’s fund pool, significantly enhancing their mixing efficiency and quality for users with mixing needs.

In Onion Mixer’s incentive program, 70% of OMT will be used for trading mining incentives. The mining rewards of Onion Mixer are calculated based on users' historical trading volumes, meaning that when OMT is produced as trading mining rewards in each block, rewards will be distributed based on each user's historical trading volume as a proportion of the total trading volume of the protocol. The larger the user's share of the overall trading volume, the higher the reward. The more transactions made, the better the mixing depth of Onion Mixer’s mixing pool.

Similarly, users providing liquidity to the OMT trading pool will receive corresponding share tokens, LP Tokens. Users can stake the LP tokens they receive on Onion Mixer’s liquidity rewards page and will earn liquidity rewards based on the corresponding ratio (staked LP tokens / total staked LP tokens). The staked LP tokens can be withdrawn at any time. Currently, there are two trading pools open: OMT/BNB and OMT/BUSD.

While using OMT as an incentive can effectively stimulate investors to push for the depth of Onion Mixer based on incentives, the selling pressure of OMT cannot be ignored.

The staking dividends of OMT can ensure a reduction in circulation. In the staking section, users have two ways to participate in staking dividends: one is through the two mining methods mentioned earlier—trading mining and liquidity mining, where users can directly deposit these two parts of mining rewards into the staking dividend pool; the other way is to recharge directly, where users can participate in crowdfunding or purchase OMT from third-party DEXs to recharge into the staking pool.

It is worth noting that users do not incur costs when recharging OMT into the staking pool, but a 10% fee will be charged when withdrawing OMT, known as the "exit penalty mechanism." This portion of the collected OMT is used for dividends to holders (4%), adding liquidity (4%), and burning for deflation (2%). Therefore, for OMT, whether users participate in staking or withdraw OMT means a reduction in the market supply of OMT, and as long as someone withdraws, it means that users staking OMT can receive dividend income.

Onion Mixer data shows that as of now, the total amount of mixed coins on the platform has exceeded $300 million, with the platform repurchasing over 50 million OMT and burning over 2.6 million OMT.

The number of holding addresses for the governance token OMT has exceeded 3,000, with an increase of 10 times compared to the public offering price.

From the perspective of investors, currently participating in Onion Mixer’s liquidity mining, the annualized yield for staking LP has reached around 1000%. For users with idle BUSD or BNB, choosing to engage in Onion Mix Mining to boost trading volume is also a good option in the current unfavorable market conditions. Currently, the transaction fee for this section is 0.5%, with an annualized yield of around 2770%. At the same time, users can repeatedly deposit and withdraw to increase their trading share without occupying personal funds.

Therefore, in the context of the overall decline in annualized yields in the DeFi sector, Onion Mixer’s yield remains quite attractive.

With the further development of DeFi, mixing will gradually become a necessity. The mixing relies on the rationality of cryptographic design in technology, and more on the application of economic models. In the current mixing field, it can be said that Onion Mixer has done well in both aspects.

Note: This article is original to Deep Chain Technology, aimed at conveying industry information and does not constitute any investment advice. For reprints, please reply with the keyword "reprint" in the background. Deep Chain Technology reminds readers to view blockchain and cryptocurrencies rationally, establish correct investment concepts, and effectively enhance risk awareness. If you discover clues about illegal activities, please actively report them to the relevant authorities.