Sanctions have slowed Tornado Cash, but usage is rising
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The results of the Tornado Cash sanctions, two years out, are mixed.
Why it matters: The strongest argument for blockchain technology has always been truly neutral money. In other words: a way to transact value that no one can step in and prevent. ("Censorship resistance" in industry-speak.)
Driving the news: A study published Wednesday by staff at the Federal Reserve Bank of New York documented in detail a growing unwillingness by participants in Ethereum's settlement chain to process transactions made through the Tornado Cash privacy application.
- Indeed, going more deeply, they observed that reluctance increased following a ruling by U.S. courts that upheld the sanctions.
Zoom out: Use of Tornado Cash plummeted for well over a year after the United States forbade people from using it in August 2022, but it began ticking back up again this year.
- While the dollar value in the protocol is up to the level it was at the time of the sanctions, that's largely explained by the rising value of the underlying assets.
- If one looks at the amount of ethers (ETH) deposited, it's clear that use of Tornado Cash is rising again, but remains about two-thirds of the levels pre-sanctions.
How it works: Tornado Cash allows a user to deposit funds and then withdraw them in a way that makes it extremely hard to connect the deposit to a withdrawal.
- The more people use it, the more money that goes in, the harder it is to make the connection between deposits and withdrawals.
- Conversely, any reluctance that law enforcement can engender around the application undermines bad actors who might use it.
Between the lines: The Fed researchers found the most reluctance among operators who are composing blocks for Ethereum to validate.
- Ethereum users send transactions out to the chain, but these don't become real until they get validated into the blockchain's ledger, which updates every 12 seconds.
- There are entities that pick transactions to go into the ledger, "composing" sets of them (blocks) and deciding what order they should run in.
- Then there are other entities that validate those blocks and stamp them onto the chain. At that point, it's done.
The validators don't seem to be worried about sanctions cooperation, but the composers are. That's what the researchers observed.
The big picture: As long as there are some block composers and validators outside of the U.S. jurisdiction, Tornado Cash transactions can probably always get through — but friction lowers the desirability of the facility.
What they're saying: "We demonstrate that although Tornado Cash transactions continue to be settled censorship-resistance appears more tenuous than what the transaction volume suggests," the authors write in their conclusion.
The bottom line: Blockchains resist regulation, but they aren't immune to it.
