Do recent sanctions threaten Ethereum’s core?
Two weeks ago, the US Treasury sanctioned Tornado Cash, a piece of software that allowed you to anonymously send crypto to another address. When doing so, they placed a bunch of Ethereum addresses on the OFAC list – basically, you cannot transact with these addressses if you’re in the US.
To you and me, it might be simple: let’s just not send crypto to those addresses. But it might get a whole lot hairier than that.
The way a Proof of Stake blockchain (which Ethereum is, soon) works is that a bunch of computers called validators get together and always agree on what the current state of the world is.
When there are new transactions that happens, one of those validators is chosen to package those transactions, then propose it to the other validators. If those validators sign off on it, that set of transactions (a “block”) is added onto the history of all the stuff that has occurred (the “blockchain”).
Where it can get nasty: if you are a validator run by a company based in the US, are you considered to be transacting with an OFAC address if you include their transactions in a block? Are you considered to be transacting with them if you sign off on someone else’s block that includes those transactions?
Currently, 2/3 of Ethereum’s post-Merge world is located in the US. If the US government decides, today, that the answer to those questions is yes, then the US government will effectively be censoring all of Ethereum.
That is the EXACT OPPOSITE of decentralization!
You land on the list, you try to do something, 66% of Ethereum’s validators exclude your transactions from blocks, and the other 34% will lose money if they try to include them (the other 66% won’t sign the blocks – this is a built-in punishment mechanism to ensure agreement).
We all hope this doesn’t happen, and if it does, some companies have already signalled they would rather exit their validators than participate in the censorship (Coinbase CEO Brian Armstrong has already said this). But these are really tough questions that need answering, because *what if it does happen*?
The chaos continues…