>If every transaction that everyone does has some outputs to darknet markets (because they’re popular and high-volume), and some outputs to legitimate businesses (because they’re also popular and high-volume) then that really is reasonable doubt that any particular individual did anything bad.

The problem is that transacting with a darknet market will still bring your illicit output % above average. Right now monero has 10 decoy outputs per transaction. If the proportion of illicit addresses to legitimate addresses were 50%-50%, then a legitimate transaction would have an average of 5 illicit outputs but a illicit transaction would have an average of 6 illicit outputs. The same applies to inputs. The difference between 5 and 6 might be small enough to be indistinguishable from background noise, but that result is heavily dependent on the proportion of illicit vs legitimate address. If the proportion is something like 95%-5%, then the difference would be 0.5 vs 1.5, which is significant. I won't bother to do the probability calculations for this, but I'm going to estimate you can get to 95% certainty within 10 transactions.

>It’s like how you can’t charge someone with possession of cocaine because there’s cocaine on the US dollar bills in their pocket: there’s actually trace amounts of cocaine on every US dollar bill.

The interesting bit is that they don't have to charge you based on that alone. If they're 80% sure you bought illegal drugs, they'll either get a warrant to search your house or perform surveillance on you and wait for you to slip up.

I get what you mean, I think — you’re talking about traffic fingerprinting. But you can use the same anti-traffic-analysis techiques used elsewhere in systems like Tox. For example, the darknet market itself could use some of its revenue to pay for “noise transactions” (wash transfers through the mixer, then intentionally “black-laundered” in the market) to keep the number of darknet-market-spent outputs constant per mixer step, by asking for advance notice from buyers for when transfers targeted at their sellers will happen, and then running N fewer “noise transactions” during the appropriate mixer steps.

Though also, you’re assuming a constant “your account” in the above. If you mix 100% of your holdings every time you transact, setting it so that a set amount goes to a darknet market, and the rest goes back to a newly-created public-key-hash that you just generated the keypair for — and then when you want to use money from that address, you fully consume it to mix it again — then nobody ever gets the opportunity to fingerprint “your” traffic. There’s no stable “you.”

(I have a theory that this is the goal Satoshi was aiming at with Bitcoin UXTOs, but never finished that element of the design, and launched it half-baked.)

This also means that the mixer gets to eat a percentage fee off of your complete holdings every transaction, so it kind of sucks, but what can you do.

> If every transaction that everyone does has some outputs to darknet markets ... and some outputs to legitimate businesses ... then that really is reasonable doubt that any particular individual did anything bad.

It says that no particular individual made a Bad Guy payment, but that all of them facilitated it by providing cover noise.