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From Tornado Cash Sanction to Ethereum - "SAY NO" to Censorship at the Blockchain Level

From Tornado Cash Sanction to Ethereum - "SAY NO" to Censorship at the Blockchain Level Source: Tornado Cash

In early August, the U.S. Treasury Department's OFAC (Office of Foreign Assets Control) placed Tornado Cash on its sanctions list, accusing the DApp of facilitating money laundry over billions of dollars.As a controversial service, it is not surprising Tornado Cash is targeted by governments. But how can a DApp (i.e. codes running automatically on a blockchain) be sanctioned? What individuals or entities will be affected by the sanction? Will more DApps be sanctioned in the future? Let's find out together.

Tornado Cash - The Largest Crypto Mixer

Tornado Cash is a cryptocurrency mixing service operating on Ethereum. At a high level, Tornado Cash is used to obfuscate the origin, destination, and number of counterparties involved in an on-chain transaction.

In our previous article(Tornado Cash - How to Make Your Transactions Untraceable?), we have given a detailed explanation of the mechanism of Tornado Cash. We also pointed out Tornado Cash is a controversial service. It protects privacy for crypto users as the blockchain reveals everything for all to see, but on the flip side, it indeed facilitates money laundering activities.

As estimated by SlowMist, 74.6% of stolen funds on Ethereum network were transferred to Tornado Cash during the first half of 2022. It is not a surprise Tornado Cash is targeted by the government, but how the sanction is implemented is a surprise.

Is It Workable to Sanction a DApp?

The Office of Foreign Asset Control (OFAC) administers and enforces economic sanctions against individuals and entities, such as terrorists and narcotics traffickers. On August 8, OFAC added Tornado Cash to its list of restricted entities. More specifically, OFAC's sanctions make it illegal for anyone to interact with 38 Ethereum smart contract addresses relating to the Tornado Cash application or assets that derive from these smart contract addresses.

Direct Impact

A company or a centralized web service can be shut down, but a decentralized application running on Ethereum cannot be shut down. It is just code automatically operating on the Ethereum blockchain.

As a consequence of the sanction, centralized services relating to Tornado Cash are now all being blocked.

  • The website is down.
  • The source code on Github is removed.
  • Centralized RPC service providers and node infrastructure providers Infura and Alchemy blacklisted Tornado Cash. The popular MetaMask wallet uses Infura as its default RPC endpoint for connecting to the Ethereum network. This means MetaMask cannot access Tornado Cash if using the default setting.
  • Centralized stablecoin issuer Circle blacklisted wallet addresses that are included in the sanctions.
  • Some DeFi protocols, such as Aave, Uniswap, and Balancer disabled their front end to those sanction-related wallet addresses. (since the front-end is a centralized web service)

Despite the sanctions and all the blacklisting from centralized service providers, Tornado Cash smart contracts still exist and are still accessible on the Ethereum blockchain. Users can still interact with the contract directly, but surely this requires some technical capability.

Furthermore, decentralized services exist for the front end and the RPC. Its front-end website can be accessed through IPFS (The InterPlanetary File System). MetaMask can be used to access Tornado Cash by resetting RPC to decentralized providers. You can find guidance on how to set up all these at the link below the image.

WARNING: Interacting with these smart contracts may constitute a violation of U.S. laws. The information provided here is only for the discussion of technical possibilities.

Guidance on how to use Tornado Cash after sanction
Source: Reddit

It is not possible to shut down a decentralized service. However, the sanction will have a deterrent effect on the people who are maintaining the decentralized application.

While Tornando Cash can still be used, any changes or updates to the protocol will be an illegal activity. Since the Protocol is governed by DAO and its governance token $TORN, participating in the governance process and voting will be illegal. The community forum is also shut down. As such, it is unlikely for the protocol to have any further development.

Ripple Effect - Can Ethereum Be Censored?

Sanction is not workable on codes running on Ethereum, but is effective to deter individuals and entities to interact with these codes. With the same reasoning, Ethereum as a decentralized smart contract platform cannot be censored, but miners (or validators in Ethereum 2.0) are individuals and entities, they could be discouraged to perform validations for certain transactions.

Ethermine Stops Processing Sanctioned Transactions
Source: Cryptoslate

Ethermine is one of the largest mining pools for Ethereum, it is founded that Ethermine stop producing new blocks that included a Tornado Cash-related transaction. There are many other miners in the current Proof-of-Work Ethereum, so transactions related to Tornado Cash are still being processed. However, the issue shows a possibility that if enough percentage of miners follow suit, although the Tornado Cash smart contract can be accessed, no transaction related to it can be processed since there is censorship on the blockchain level.

In Ethereum 2.0, miners will be replaced by validators who are responsible for validating new transactions and producing new blocks for the blockchain. While anyone can choose to stake 32 $ETH and to be a validator, it is common practice for $ETH holders to use a staking service provider, such as Binance Stake, Coinbase Stake, or P2P Stake. Most of the big staking service providers are well-known entities, and they can be pressured to stop performing validation for certain transactions.

Closing Thoughts

Tornado Cash helps preserves privacy but also facilitates money laundry. It is understandable that the government needs to do something to prevent these money laundry activities. In the future, Tornado Cash will have a hard time making a comeback. Even the entire Crypto Mixer industry will face a massive reshuffle. Will this go some way to stopping the growing hacking activity? Let's wait and see.

However, the censorship on the Ethereum level is much more worrying for me. I'm sure many people, including myself, once thought it would be difficult for governments to directly sanction a DApp or its users, except for companies involved in the development of blockchain projects. But it turns out that as long as any part of the process involved in decentralized services is a regulated individual or entity, it cannot escape the grasp of the legal system.

So can we really "SAY NO" to censorship of transactions at the blockchain level? In the short term, we need more decentralized, worldwide validators in order to prevent a transaction from being influenced by anyone or any entity. But this is only a temporary "escape" from the legal sanctions of some countries. In the long run, when all countries and regions have established a comprehensive legal system for the blockchain industry, all decentralized networks will be subject to transaction censorship without exception.

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