I have recently heard of a bitcoin theft where the thief used a bitcoin tumbling service in an (apparently unsuccessful) attempt to cover their tracks. From this event I have several related questions:
A tumbler is used to hide/disguise/make it difficult to prove where bitcoins came from.
It might help to first understand that every bitcoin transaction, right back to the genesis (very first) block is available for public inspection in the block chain.
Note that the actual bitcoins are not trackable, only the amounts, addresses and the transactions - this is important.
To be able to complete a transfer of bitcoins, you need to know the private key for an address AND know the transaction ID of an unspent transaction sending bitcoins to that address - You don't just send someone 1BTC, you send them 1BTC out of the 1.2BTC you received from person X. In other words, the balance of an address is the sum of the unspent transactions and each transaction clearly shows where the bitcoins came from.
A tumbler attempts to sever the links between your old address and a new address by sending coins from you to other people and coins from them to you. It also randomizes transaction amounts and sometimes adds time delays to the transactions.
Generally there should be no link between the original transactions and the final address of the coins.
How does a bitcoin tumbler "launder" bitcoins? This is probably answered above
Is a tumbling a viable laundering scheme? Yes, provided that you are tumbling a small amount of BTC compared to the total volume going through the tumbler (I have no idea what the ideal ratio is). Remember also that the tumbler will give out other peoples coins. If all the coins going through a tumbler are stolen, you're going to receive stolen coins back, they just won't be linked to the coins to started with.
How would tumbling be made a more/less successful? See answer to 2.
Edit: Take a look at https://blockchain.info/taint/1AYdAw8CcrQ2wx55LTbFHRn5bxgNZhaRLW - this shows that 6.6% of the coins at that address came from 1nWxbsMV7XKp7zi2Pq8FzK9HfoPTnBwKV - you can trace it all the way back to when the coins were mined
I recently came across an article that clearly articulates what a tumbler intends to accomplish. The analogy they gave was a collection plate at a church:
You may have seen collection bags that go around churches, where you put a bill in your closed fist and stick your hand in the bag, so no one knows how much you put in or took out. Imagine that we come up with a (cryptographic) protocol where I donate some amount to the local church's collection bag, so do others (however much they desire), and after the bag has made it through the congregation, I stick my hand in again and take out exactly as much as I put in during the first round from the same collection bag. In essence, we swap our bills so as to throw off anyone who may have recorded the serial numbers and is watching the coins. That's, roughly speaking, what happens in tumblers…
The way bitcoin transactions work causes them to be chained together in a permanent public record. They are traceable along the blockchain from one bitcoin address to another. A bitcoin laundry breaks this chain by having two independent wallets, receiving bitcoins to one wallet and sending them from another wallet. Instead of the transaction being a permanent public record, only the bitcoin laundry knows where the bitcoins came from and where they went. The end result is that the bitcoins can't be traced directly through the blockchain.
