Securely swapping bitcoins

[notfed]

I've just recently read the technical explanation of how Bitcoin works, and its pros and cons.  One of the issues I see is mentioned https://en.bitcoin.it/wiki/Anonymity.  In summary, it's possible that a given of your bitcoins might be flagged as "dirty", where the bitcoin's history connects it to some undesirable transaction.

Is there a secure way to have two people swap bitcoins, without needing to trust each other?  I ask this because if it were possible, then it might be easier to create a secure website that acts as an anonymity provider, shuffling bitcoins around.  Otherwise, you have to give your bitcoins to the anonymity provider, trusting that they will give you different coins in return.

[terrytibbs]

These services are called... *drumroll* laundry services (politically correct term: "Mixing service")!

[notfed]

Okay so that's what they're called.  Now my question is, is there a way to do it securely?  Looking at it as just a "I trade you 1 bitcoin for 1 bitcoin" standpoint, I'm having trouble seeing how you could do it without trusting the person you're trading with.

[terrytibbs]

Bitcoin Fog is probably the most privacy-oriented of them all:
https://bitcointalk.org/index.php?topic=50037.0 (read about their security precautions)

[notfed]

I get the feeling the answer is "no".  The link you provided even says in their disclaimer "With a service like ours it will always be an issue of trust of course..." 

If there was a way to guarantee a swap between two peers (maybe using some kind of proof-of-work trick, I don't know, I can't think of any), I think it would be a worthy addition to bitcoin in general.  It's the only foreseeable way to prevent tracing the history of transactions; a negative side-effect of Bitcoin when compared to conventional money.

[Rygon]

I'm still trying to understand bitcoin economics, but even if some of your bitcoins have been associated with something illegal, AKA "become dirty", how would this really affect someone in the "Real World"? I can understand that it's easy to trace bitcoins from address to address, and that someone (let's say law enforcement) links you to a particular address that had money transferred from someone who gained that money unlawfully. As long as you weren't involved in those illegal activities, or purposely laundering money for people, I think most laws in most countries would protect you. Isn't it the same thing a drug dealer who buys a new car with dirty money? The long arm of the law can confiscate the car and sell it, but they won't go into the car dealerships bank account and take back that cash without some sort of compensation. I'm sure that's not 100% true in all economies across the world.

Of course, that's all assuming you haven't passed those bitcoins onto someone else, so it's now their problem. But don't bitcoins also make law enforcement easier by allowing traceability from one person to another? I think the way it works might go something like this: Johnny Druguser gets caught with pot, then the police could coerce him to give up his address he used to send money. They track the coins to the receving address, and start doing detective work to find a real name associated with that address. Perhaps through an exchange site, they might be able to get the ID of Pablo Drugdealer. Even if he laundered them through unwilling intermediaries, like Joe Innocent who sells Pablo a book, there will be some sort of identification, right? A physical address, email address, IP address from the website the trade orginiated, etc.

Someone tell me if I don't properly understand this process (entirely possible)

[jevon]

A standard transaction with two inputs and two outputs could do a secure swap.

  input 1: Alice   output 1: Bob (new address)
  input 2: Bob     output 2: Alice (new address)

Alice signs her input and Bob signs his. The transaction isn't valid until they both sign.

It would be more interesting with a larger group:

  input 1: user1     output 1: user3
  input 2: user2     output 2: user2
  input 3: user3     output 3: user6
  input 4: user4     output 4: user5
  input 5: user5     output 5: user1
  input 6: user6     output 6: user4

This is actually simple compared to the mind bending stuff in the wiki Contracts article:
https://en.bitcoin.it/wiki/Contracts

I've been reading that article, and it seems like there might be a way to swap using two separate transactions, without revealing they're related. If I figure that out I'll post.