While Bitcoin can provide a degree of anonymity, it is not inherently private. This is mainly because transactions and balances are made public on the blockchain, thus making them traceable.
In addition, if a user purchases bitcoin from an exchange that requires a KYC (know your customer) file, the funds are directly associated with a person's identity.
CoinJoin is a tool that enhances privacy by anonymizing bitcoin transactions: when bitcoin users use CoinJoin (a process also known as "blending") to transact with each other, they mask the origin and destination of the funds, thereby greatly enhancing their privacy.
How does it work?
In the simplest terms, CoinJoin combines multiple coins (UTXO) from different senders into a single transaction. The output of this transaction produces bitcoins of the same value, but the addresses are now mixed. This makes it extremely difficult for external parties to deduce who sent the funds and who received them, as the origin of the UTXO is obfuscated.
- If you send bitcoins through the CoinJoin protocol, the recipient will not know how you got the funds
- If you receive bitcoins through the CoinJoin protocol, the sender will not know how you use the funds.
CoinJoin does not guarantee 100% privacy, as there are almost always advanced methods that an "interested" external party can use as a vector of attack. However, CoinJoin does significantly improve the privacy of Bitcoin users compared to transactions that do not use the protocol.