The recent US Treasury’s OFAC sanction of Tornado Cash has had a windfall of effects on the crypto community. The community is in shock and is doubting Ethereum’s Censorship Resistance.
With the Proof-of-Stake upgrade fast approaching, the Ethereum community is debating whether the recent sanctions against Tornado Cash may end up jeopardizing the blockchain itself.
What Went Wrong!!
The US Treasury’s Office of Foreign Assets Control (OFAC) recently added the popular privacy protocol Tornado Cash to its sanctions list, claiming that the app was primarily used for money laundering by cyber criminals. The move is unprecedented in that it is the first time that an open-source code has been sanctioned.
Following the announcement, Dutch authorities detained a Tornado Cash developer as a part of a separate investigation into the privacy protocol.
Several companies, including stablecoin issuer Circle, software version management platform Github, and Ethereum infrastructure provider Infura, promptly complied with the sanctions, blacklisting all Ethereum addresses related to Tornado Cash listed in the OFAC statement.
The Tornado Cash case establishes a troubling precedent, and the crypto community is now concerned that centralized entities running Ethereum Proof-of-Stake validators may be forced to censor transactions on the Ethereum blockchain itself in the future.
Also Read: Why did U.S. OFAC Sanction Tornado Cash?
If they do not comply with the demands of governing authorities, they will almost certainly face legal charges and be imprisoned.
This collective fear and action from OFAC are sparking debates among the community regarding Ethereum’s Censorship-Resistance.
The crux of the issue is that once Ethereum is upgraded, it will no longer rely on Proof-of-Work miners to reach consensus, but instead on Proof-of-Stake validators.
These validators must stake ETH tokens instead of expending energy to create new blocks, as miners do. While each validator requires 32 staked ETH to operate, a single entity can run multiple validators, increasing their network influence.
Furthermore, the community believes that most of the largest validating entities would almost certainly be required to comply with the OFAC regulations. Crypto exchanges like Binance, Coinbase and Kraken, Ethereum staking services like Lido, and crypto service providers like Bitcoin sussie will be forced to stop working if they don’t censor ethereum transactions.
Community Response on Ethereum Censorship Attempt
In response to these censorship concerns, multiple community members started pointing towards the slashing system embedded in Ethereum’s upcoming Proof-of-Stake consensus mechanism.
Ethereum creator Vitalik Buterin had stated, “if a 51% coalition starts censoring blocks, other validators and clients can detect this, and use the 99% fault tolerant consensus to agree that this is happening, and coordinate a minority fork.”
In other words, if the largest validators decide to censor transactions, the rest of the Ethereum validator community, even if in the minority, has the option of destroying censoring validators’ funds.
Are the OFAC Regulations an Attack on Ethereum itself?
The possibility of slashing large validators funds gives way to the question:
Should compliance with OFAC regulations be regarded as an attack on Ethereum itself?
Though Bitcoin Advocates like ERIC WALL commented, “Ethereum can’t comply with all nations’ censorship demands at the validator level, Zero censorship is the only neutral option for global consensus.”
Also OFAC can’t directly force validators as large validators who have already skated ETH into the beacon chain may be left with only a few options. After the Merge, staked ETH will be locked until 2023, preventing validators from withdrawing their staked funds from the Ethereum network even if they wanted to avoid censoring transactions in accordance with the OFAC regulations.
They do have the option to “voluntarily exit” by ceasing to perform their validator duties. They would then be unable to rejoin the network or access their ETH until withdrawals were enabled. Worse, they could face inactivity fees equal to 50% of their stake.
Hence, at every point the Ethereum community will avoid censorship.
However, before we can say “Ethereum would never support censorship”, there are a lot of nuances behind this, primarily with Flashbots and block building. There was a major discussion regarding this at the Ethereum Core Devs meeting this week.
TRM Labs has already launched a wallet screening service that allows DeFi protocol frontends to block sanctioned addresses or addresses that have been the counterparty of sanctioned addresses. This step sparked a massive outrage in the crypto community.
Flashbots, an organization that assists Ethereum in mitigating the risks of on-chain price arbitrage, also announced that it would be blacklisting addresses sanctioned by OFAC, prompting validators to switch to a different relay.
In response to the criticism, Flashbots made their own relay code open source.
Is Ethereum’s censorship resistance under attack?
The honest and most appropriate response to this is that there isn’t a definitive yes or no answer to the query. We can only wait for the unfurling of the further events to see where these sanctions lead.
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