CoinJoin is a tool that allows Bitcoin users to combine and mix their transactions in order to provide greater anonymity. It does this by using the UTXOs (unspent transaction outputs) of each participant to generate a scheme of varying denomination inputs and a single transaction output that conceals individual ownership of specific coins effectively.
To be effective, CoinJoin requires participation by other users willing to mix their coins with others. If there aren’t enough participants available at any given time, the CoinJoin process will drop and restart. During the CoinJoin process, each participating user’s transaction signature will be verified by the other participants, and the final CoinJoin transaction will be broadcast to the Bitcoin network and recorded on the blockchain.
The participants’ UTXOs will be combined into one large scheme of varying denomination inputs and consolidated into the final CoinJoin transaction, which is then broadcast to the Bitcoin network and recorded on the Blockchain. Once the final CoinJoin transaction is validated and confirmed, the original UTXOs will be released back to their respective addresses.
Although CoinJoin increases privacy by obscuring the relationship between sender and recipient addresses, it does not prevent blockchain analysis from identifying a particular wallet or address. Moreover, some businesses may flag cryptocurrency transactions conducted by a wallet that has participated in CoinJoin because they may view it as evidence of money laundering, which is illegal. For these reasons, it is important to review local laws and regulations before conducting a CoinJoin.