Early Tornado Cash Contributor Builds Improved Version of Blacklisted Coin Mixer – Here's How it Works
Half a year after lead developer Alexey Pertsev was arrested in the Netherlands, the Tornado Cash coin mixer has been rebuilt and redeployed as Privacy Pools.
Originally the thought-child of Vitalik Buterin, Tornado Cash serves to meet the demand for a privacy-focused coin mixer on Ethereum.
Tornado Cash was developed with funding from MolochDAO, a grants-awarding decentralized autonomous organization.
Community hopes ran high as the dApp passed through development audits quickly.
How crisis engulfed Tornado Cash
But crisis struck the project when North Korean hackers stole $620m from top GameFi project Axie Infinity on March 29, 2022.
As hackers began to clean the loot, anti-money laundering controls kicked in and on May 8 2022, the Office of Foreign Asset Control (OFAC) sanctioned 'blender' a custodial coin mixer, alleged to have been used to clean $20m in stolen crypto.
Not long after, on August 8, OFAC was knocking on the doors of Tornado Cash, with the project hit by similar sanctions on the allegation that the dApp had been used to launder $100m of stolen funds by the North Korean hacker group.
Just a day later, Tornado Cash's lead developer Alexey Pertsev was put in handcuffs in the Netherlands, accused of money laundering.
Denied bail, the programmer remains in Dutch prison more than six months later for little more than writing code.
Community efforts have rallied around the @free_alexey Twitter account to support his release. This included a 200 ETH donation from MolochDAO.
This hasn't stopped US regulators banning US citizens from using Tornado Cash, proving the age-old idiom 'when you make privacy criminal, only criminals have privacy'.
Tornado Cash Bouncing Back
Despite best efforts by US regulators, Tornado Cash has continued to handle the impressive volume. The project is still on track to anonymize and mix $250m in volume by the end of 2023.
More surprising still was the mention of Tornado Cash in a St Louis Fed report published on the topic of tradeoffs between privacy and regulation.
"Tornado Cash may become an integral part of public blockchain infrastructure", said the report as it suggested users could use the service to ensure blockchain privacy from other users while collecting intermediary receipts to provide to government authorities.
And indeed, the arrest of the project's lead developer and efforts to sanction the service has done little to stifle development.
In the face of mounting pressure to prove privacy-focused users aren't associated with funds from the North Korean heist, original contributor and Spankchain developer Ameen Soleimani has introduced 'self-sovereign anonymity'.
This allows users to exclude some subset of deposits when they withdraw funds.
Simply put, just because dodgy coins have been deposited into the same smart contract as you doesn't mean they can also force you into sharing an anonymity set with them.
The new version deployed as V0 of freshly-named Privacy Pools has now gone live, and while the code is still in its early stages and as of yet unaudited, this could be one of the biggest privacy bouncebacks of 2023.