Given the Sanctions on Tornado Cash, Is Ethereum Censorship Resistant?

Andrew Hinkes, partner at K&L Gates and adjunct professor at NYU, and Martin Köppelmann, cofounder of Gnosis, talk about the sanctions on Tornado Cash, how they will impact Ethereum on the base layer, and the likelihood of having two chains. 

Show highlights:

• the legal meaning of the OFAC sanctions on Tornado Cash and why it is causing complications
• how legislation is built for the fiat world, and how in DeFi and crypto there’s no clarity 
• how miners have changed their behavior prior to the Merge
• whether a proof of work chain or a proof of stake chain would be more censorship resistant
• whether laws apply to validators in a PoS chain
• the ways in which the government could provide more clarification 
• the different entities involved in Proof of Stake
• the liabilities for each entity in PoS and what secondary liability is
• how the task of the bidder can be described as a mathematical optimization problem
• whether Lido is exposed to US regulations
• how long would it take for a large staker like Coinbase to stop being a validator
• how a user-activated soft fork works and the conditions in which a fork could happen
• whether social slashing is enforceable considering it is not in the protocol
• the likelihood of Ethereum becoming a permissioned system
• the role of Flashbots’ relay code and what it means for Ethereum’s censorship resistance
• how DeFi’s exposure to US-based institutions can affect the likelihood of the chain complying with sanctions
• whether DAI is just wrapped USDC
• how MakerDAO is trying to be more independent of USDC
• why US-based companies will choose a conservative path, considering the lack of guidance
• the importance of educating the regulators 
• how cash and crypto are the only remaining private payment methods 

Thank you to our sponsors!

Ava Labs: https://avax.network

a16z: https://link.chtbl.com/HObAJQDL?sid=unchained

Guests

Andrew

Twitter: https://twitter.com/propelforward

Martin

Twitter: https://twitter.com/koeppelmann

Previous Coverage of the Tornado Cash Sanctions on Unchained:

• Is TRM Labs Blocking Addresses From DeFi Protocols? Ari Redbord Says No: https://unchainedpodcast.com/is-trm-labs-blocking-addresses-from-defi-protocols-ari-redbord-says-no-ep-387/
• Tornado Cash Sanctioned. Did the Government Overstep Its Bounds?: https://unchainedpodcast.com/tornado-cash-sanctioned-did-the-government-overstep-its-bounds-ep-384/
• The Chopping Block: Did OFAC Overstep by Sanctioning Tornado Cash?: https://unchainedpodcast.com/the-chopping-block-did-ofac-overstep-by-sanctioning-tornado-cash-ep-386/

Social Slashing and Censorship on ETH

Axios summary of the situation: https://www.axios.com/2022/08/23/how-transactions-might-be-censored-after-ethereum-changes-next-month

BitMex research on how the sanctions affect Ethereum: https://blog.bitmex.com/ofac-sanctions-ethereum-pos-some-technical-nuances/

Ethermine banning transactions: https://twitter.com/takenstheorem/status/1560690035955011585?s=20&t=59hWdhr8_O-hYA8uYnZJ8w

Nic Carter’s article: https://www.coindesk.com/layer2/2022/08/25/if-ethereum-starts-slashing-it-burns/

Eric Wall’s article on social slashing: https://ercwl.medium.com/the-case-for-social-slashing-59277ff4d9c7

CoinDesk article: https://www.coindesk.com/tech/2022/08/23/as-censorship-on-ethereum-begins-could-this-open-sourced-code-help-counter-it/?outputType=amp

Hetzner banning Ethereum users: https://twitter.com/koeppelmann/status/1563146729314467840?s=20&t=ubFhCQqrQyHKfflgMHEmJw

Tornado Cash

• Treasury Press release:  https://home.treasury.gov/news/press-releases/jy0916#:~:text=WASHINGTON%20%E2%80%93%20Today%2C%20the%20U.S.%20Department,since%20its%20creation%20in%202019
• Developer arrested: https://www.fiod.nl/arrest-of-suspected-developer-of-tornado-cash/
• Rep. Emmer’s letter: https://twitter.com/RepTomEmmer/status/1562084891247902721?s=20&t=9J3c3scVdxsLKVcFovaWdQ
• Tornado Cash post on compliance: https://tornado-cash.medium.com/tornado-cash-compliance-9abbf254a370
• Coin Center’s article authored by Jerry Brito and Peter Van Valkenburgh: https://www.coincenter.org/u-s-treasury-sanction-of-privacy-tools-places-sweeping-restrictions-on-all-americans/
• Second Coin Center article authored by Jerry Brito and Peter Van Valkenburgh: https://www.coincenter.org/analysis-what-is-and-what-is-not-a-sanctionable-entity-in-the-tornado-cash-case/
• Coin Center may challenge the US Treasury’s decision to sanction Tornado Cash: https://decrypt.co/107475/coin-center-tornado-cash-ban-court
• What the sanctions mean for privacy coins: https://www.coindesk.com/layer2/2022/08/09/what-the-tornado-cash-sanction-means-for-privacy-coins/
• Celebrities get Dusted: https://decrypt.co/es/107090/tornado-cash-dusts-public-wallets-jimmy-fallon-brian-armstrong-steve-aoki-logan-paul

DAI and USDC

• Maker forum: https://forum.makerdao.com/t/the-path-of-compliance-and-the-path-of-decentralization-why-maker-has-no-choice-but-to-prepare-to-free-float-dai/17466
• MakerDAO founder asks DAI to remove Dollar peg:  https://decrypt.co/107273/makerdao-founder-dai-drop-dollar-peg-tornado-cash-usdc
• Circle freezes USDC in sanctioned wallets: https://www.theblock.co/post/162172/circle-freezes-usdc-funds-in-tornado-cashs-us-treasury-sanctioned-wallets 

Flashbots

• Flashbots relay open source: https://twitter.com/hasufl/status/1559908331145265156?s=20&t=gtHe5sVetxQXVKfZL2VMYg
• MEV Boost: https://www.alchemy.com/overviews/mev-boost
• MEV in ETH PoS: https://writings.flashbots.net/writings/mev-boost-call-for-testing

Proposer-Builder separation: https://www.alchemy.com/overviews/proposer-builder-separation