As cryptokoin.com reported, the Ethereum Merge upgrade is fast approaching, while the Community is debating whether the latest sanctions against Tornado Cash will endanger blockchains.
As Ethereum Merge approaches, the community is worried about censorship.
Just a month away from Ethereum’s transition from Proof-of-Work consensus mechanism to Proof-of-Stake. Known as “Merge,” the transition will reduce the network’s energy consumption by 99 percent. It will also reduce token emission rates by 90 percent. However, the highly anticipated upgrade, which has been delayed many times in the past, will take place on September 15 next month. With that came OFAC’s decision to add the popular privacy protocol Tornado Cash to its sanctions list. Thus, he claimed that the app is primarily a money laundering tool for cybercriminals. This is an unprecedented move as a piece of open source code has been added to a sanction list.
Dutch authorities have arrested a Tornado Cash developer in connection with a separate investigation into privacy protocol. A few companies such as Circle, Github and Infura took immediate action. Thus, it immediately complied with the sanctions by blacklisting Ethereum addresses linked to Tornado Cash. The Tornado Cash case sets an alarming precedent. The crypto community has deep concerns that centralized entities running Ethereum Proof-of-Stake validators may be forced to censor transactions on the Ethereum blockchain itself in the future.
Is Ethereum Merge upgrade vulnerable to censorship?
When Ethereum rises, it will rely on Proof of Stake validators, not Proof-of-Stake miners, to reach consensus. It won’t take energy to create new blocks like miners do. Instead, these validators should own ETH tokens. 32 ETHs are needed for each validator to work. Also, a single entity can run multiple validators, increasing their impact on the network.
Aviv has selected crypto exchanges Coinbase and Kraken, staking services Stake and Lido, and crypto service provider Bitcoin Suisse as assets that will be forced to censor transactions on Ethereum. If the biggest validators decide to censor transactions, they have the option to destroy the funds of the censor validators. Vitalik Buterin, the creator of Ethereum, wrote in a tweet in 2018:
If a 51 percent coalition starts censoring the blocks, other validators and clients can detect it happening. Using 99 percent fault-tolerant consensus, he can acknowledge that it’s happening and coordinate a minority Fork.
OFAC compliance as censorship
The possibility of cutting large validator funds raises another question. Should compliance with OFAC regulations be seen as an attack on Ethereum itself? Swedish Bitcoin advocate Eric Wall says:
Ethereum cannot satisfy all countries’ censorship requests at a validating level. Zero censorship is the only neutral option for global consensus.
fwiw I voted X in your above poll
— vitalik.eth (@VitalikButerin) August 15, 2022
In a poll, Wall asked whether the Ethereum community should burn shares of major validators trying to comply with OFAC sanctions. Of the 9,584 Twitter users who participated, 61.2 percent voted in favor and 9.3 percent voted against it. 29.5 percent wanted to see the results. Vitalik Buterin also stated in a comment that he was among those who voted yes. After Merge, the ETH deposited will remain locked until 2023. This means that validators will not be able to withdraw their deposited funds from the Ethereum network, even if they want to avoid censoring transactions according to OFAC regulations.
Brian Armstrong: I hope this is an assumption we won’t face
One option they have is to “voluntarily exit” by stopping performing their validator duties. By doing this, they will not be able to rejoin the network or access their ETH until withdrawals are activated. Worse, they could be hit with inactivity fees, potentially worth 50 percent of their shares. When asked on Twitter whether Coinbase would prefer to censor transactions or shut down its validators, CEO Brian Armstrong replied:
This is a hypothetical assumption that I hope we will not actually face. But if we did, I think we would have kept [closed]. It should focus on the big picture. There may also be a better option (C) or legal challenge that can help achieve a better outcome.
It's a hypothetical we hopefully won't actually face. But if we did we'd go with B i think. Got to focus on the bigger picture. There may be some better option (C) or a legal challenge as well that could help reach a better outcome.
— Brian Armstrong – barmstrong.eth (@brian_armstrong) August 17, 2022
Beyond the question of Ethereum’s consensus mechanism, some crypto projects in the ecosystem have decided to preemptively make sure they are OFAC compliant. TRM Labs has launched a wallet scanning service that allows decentralized finance (DeFi) protocol front-ends to block sanctioned addresses or counterparties of sanctioned addresses. The decision caused criticism from the crypto community. Yearn.Finance lead developer Banteg shared an article from the DeFi hack victim explaining that he was unable to access his funds on the DeFi lending protocol Aave. Because there was a direct transfer between his wallet and an approved wallet before. This transfer was a hack that lost $200,000.
All that needs to be done with Ethereum Merge upgrade: Censorship resistance
Flashbots, an organization that helps Ethereum mitigate the disadvantages of on-chain price arbitrage, stated that it will blacklist OFAC-approved addresses and call for validators to use a different relay. The Flashbots responded to the criticism by open-source their own relay code. Rettig said in a statement:
As the Ethereum Merge deadline approaches with each block, the uncertainty surrounding the fate of the ecosystem weighs heavily on some. Ethereum had only one job: censorship resistance. If you can’t do that, then none of this makes any sense and we should all pack up and go home now.
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