Vitalik Buterin and Jacob Illum of Chainalysis have recently developed a fork of the well-known decentralised cryptocurrency mixer Tornado Cash that is much more ‘compliant’ with the legal requirements of the United States of America and many other countries.
With the new protocol, it is possible to achieve maximum privacy when moving money in crypto, while at the same time being able to verify, through zero-knowledge cryptographic proofs, that the funds being transferred do not originate from hacks or illegal activities.
Privacy Pools was launched as a demo on Optimism in March, and now experts in the blockchain world are discussing the political implications and benefits for the entire web3 community.
Here are all the details.
Summary
- Tornado Cash: cryptocurrency privacy mixer that benefits cybercriminals
- Privacy Pools: a ‘compliant’ alternative to Tornado Cash using zero-knowledge cryptographic proofs
- The Potential of Zero-Knowledge Cryptographic Proofs
Tornado Cash: cryptocurrency privacy mixer that benefits cybercriminals
Tornado Cash is a decentralised protocol that helps users achieve a very high level of privacy by mixing their cryptocurrencies into pools so that they lose track of them in blockchain registries.
The application has become very popular and is currently available on several chains including Ethereum, Binance Smart Chain, Polygon, Optimism, Arbitrum, Gnosis and Avalanche.
The problem for Tornado Cash is that it is currently considered a highly dangerous tool by several US federal agencies, which have found it to be very helpful in facilitating money laundering and the flow of illicit funds.
In 2022, the Office of Foreign Asset Control (OFAC), an agency of the US Treasury Department, sanctioned the protocol for helping cybercriminals from the North Korean Lazarus Group launder hundreds of millions of dollars through it.
Tornado Cash was also allegedly used by hackers who attacked the Ronin sidechain bridge and the Kucoin and Bitmart exchanges, laundering a significant amount of money that is now untraceable on the blockchain.
The US authorities, who had to react strongly to this potential IT threat, decided to arrest all 3 founders of the protocol, despite the fact that it is only a simple open-source code.
Specifically, a year ago, Alexey Pertsev, considered to be the main originator of the idea, was arrested, followed later by the other two ‘partners’ Roman Storm and Roman Semenov.
The matter became so serious that even blockchain infrastructure providers such as Infura and Alchemy censored access to Tornado Cash, which can only be accessed via personalised RPCs.
Privacy Pools: a ‘compliant’ alternative to Tornado Cash using zero-knowledge cryptographic proofs
Vitalik Buterin, Jacob Illum of Chainalysis and Ameen Soleimani, co-founder and CEO of Spankchain.
Given Tornado Cash’s track record, they had been working for some time on a fork protocol that could restore the same canon of privacy by removing the facilitator for illicit cryptocurrency trade.
In March, they demonstrated a first version of Privacy Pools, the ‘compliant’ version of the offending application, on the Optimism network.
To summarise how the application works, it allows users to conduct anonymous transactions using “zero-knowledge cryptographic evidence” to prove that the funds from such anonymous transactions are NOT linked to criminal activity.
13/ Our demo is live – https://t.co/Nt4b2Tgx1D
Now, users have the option to help regulators isolate illicit funds, without revealing their entire transaction history.
Let’s watch a brief video of it in action: pic.twitter.com/An9lWx6jfr
— Ameen Soleimani (@ameensol) March 4, 2023
This is a compromise that allows users to retain their right to privacy, while allowing authorities to prove that their wallets are not linked to illicit transactions and that the funds do not come from hacks and black markets.
Zero knowledge proofs are the real stars of this revolution, making it possible to prove certain information without revealing the records of the people using it.
Now, the computer scientists behind the Tornado Cash fork are working to prove that the technology behind Privacy Pools can be extremely useful as a neutral infrastructure to connect public blockchains with different international regulations and jurisdictions.
With the help of Matthias Nadler from the University of Basel and Fabian Schär from the Centre for Innovative FInance, they have managed to publish a very important paper entitled “Blockchain Privacy and Regulatory Compliance: Towards a Practical Equilibrium’, which represents a milestone for the concept of‘”privacy compliant” on the web3.
There is still a long way to go before the Privacy Pools mechanism becomes mainstream and is adopted at the legislative level by the US and the rest of the world, but the road to an era of cooperation has already been mapped out.
Excited to announce that our new paper on #tornadocash and #blockchain privacy, will be published by the @stlouisfed Review! This is joint-work with @mat_nadler. Pre-print online:
https://t.co/aHwAFygXZQ pic.twitter.com/wbHtOnkn5G— Fabian Schär (@fschaer) February 3, 2023
The Potential of Zero-Knowledge Cryptographic Proofs
Zero-knowledge cryptographic proofs, also known by the acronym “zk-proofs”, represent a real revolution in the blockchain sphere, capable of solving a number of problems and legal quibbles, such as those related to the use of the open source Tornado Cash protocol.
This extraordinary technology has also been very helpful in solving some of the scalability problems of the Ethereum blockchain, which can now count on an ever-growing landscape of layer 2 rollups that make the decentralised network more efficient.
Indeed, between 2020 and 2021, the high cost of gas on Ethereum will force many developers to find alternative solutions to enable an optimal user experience for those using DeFi with limited funds.
ZK rollups and optimistic rollups were the solution to this problem, moving requests and transaction processing outside of the Ethereum mainnet and turning everything into a single, much less cumbersome and heavier batch.
This reduced the waiting time and gas costs associated with using smart contracts and decentralised applications on the main web3 blockchain network.
Today, we can count on the existence of respectable infrastructures such as Arbitrum and Optimism (optimistic rollup), which use ‘fraud proofing’ to check whether a transaction contains false values that would alter the historicity of Ethereum, and in case of detection, cancel the TX in question.
At the same time, we can see how other ZK rollup networks are emerging with increasingly popular ecosystems such as zkSync, Linea, Starknet and Polygon zkEVM, which use knowledge (and not fraud) proofs to verify every single transaction that passes through them.
The entire DeFi community and blockchain experts are excited about the development of these technologies, which are proving to be extremely useful and applicable in different areas of the web every day3.
