Ethereum: Tornado Cash hit, but not sunk

Placebo effect for regulation? – 2022 has been the year of many innovations in the ecosystem of cryptocurrencies. It was also the year of regulations. Thus, we have seen in particular Office of Foreign Asset Control (OFAC) Establish Sanctions Against Tornado Cash. Have these sanctions been effective?

OFAC vs. Tornado Cash

At the beginning of last August, the Tornado Cash protocol was at the center of attention. In effect, the US Office of Foreign Asset Control has blacklisted the protocol.

Thus, the American organization accused Tornado Cash of having facilitated the laundering of more than 7 billion dollars. In response, OFAC decided to issue sanctions against the protocol and entities that interact with it.

Soon, many US-based crypto services moved to censor the protocol. Subsequently, this censorship even extended to Ethereum blocks, with the application of OFAC measures by many block producers.

Share of OFAC compliant blocks on Ethereum.
Share of OFAC compliant blocks on Ethereum.

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Are OFAC sanctions effective?

On January 9, the company chain analysisspecializing in on-chain data analysis, published a study aiming to measure the effectiveness of the sanctions put in place by OFAC.

“We will see how the U.S. government’s cryptocurrency sanctions strategy has evolved over time, examine the types of entities it has sanctioned so far, and analyze the impact of these sanctions on the entities they themselves and the broader crypto-crime ecosystem. »

More and more sanctions and sanctions

As a first step, Chainalysis tried to do a history of sanctions. To do this, the company has compiled data since 2018, the date of the first measurements issued by OFAC.

Thus, we can see that the number of sanctioned addresses and companies has grown steadily since 2018. Nevertheless, it is important to note that these actions remain relatively anecdotalwith only about ten sanctioned entities in 2022 for a total of around 350 addresses.

Number of OFAC-sanctioned entities and addresses.
Number of OFAC-sanctioned entities and addresses.

In 2022, the three most important entities targeted by OFAC were:

  • Hydrathe darknet market;
  • Tornado Cashthe decentralized mixer;
  • Garantexthe Russian decentralized exchange.

What impact have these sanctions had?

However, OFAC remains an American organization, therefore the sanctions applied do not necessarily have the desired effect on a global scale.

Thus, Chainalysis wished determine the real impact of these sanctions by analyzing on-chain activities related to sanctioned entities, after OFAC placed them in its sights.

“The on-chain data shows that each of the three sanctioned services was affected differently. »

Volumes on the 3 platforms, before and after sanctions.
Volumes on the 3 platforms, before and after sanctions.

As we can see from the graph above, Sanctions against Hydra seem to have paid off. Indeed, cryptocurrency transfers linked to this platform collapsed after the sanctions were put in place.

For its part, the Tornado Cash mixing protocol also recorded a notable drop in activity after the implementation of sanctions by OFAC. Thus, the protocol recorded a volume ranging from 5 to 10 million dollars before the implementation of the sanctions. After these, the protocol saw its volume collapse, so that it rarely exceeds 5 million dollars.

Therefore, the sanctions put in place by OFAC appear to have had a moderate impact on Tornado Cashcertainly reducing the volume, but much less significantly than on the Hydra market.

“As a global service, Tornado Cash likely had a larger number of users who could face consequences for violating US sanctions or be disqualified from using other services if their wallets showed exposure to Tornado Cash after its designation. »

Finally, the decentralized exchange platform Garantex did not flinch in the face of OFAC sanctions. Indeed, it even recorded an explosion in its volume after the announcements of the American organization.

Conclusion: a half-hearted victory for OFAC

As Chainalysis points out, OFAC’s reach remains limited and its sanctions do not always have the intended effect.

For example, the sanctions allowed the Tornado Cash site to be taken offline. Consequently, it has become much less accessible, effectively reducing its audience. Nevertheless, under the hood Tornado Cash is made up of unstoppable smart contracts. As a result, it can still be used despite the implementation of sanctions.

“This suggests that sanctions against decentralized services act more as a tool to discourage use of the service rather than shutting it down altogether. In the case of Tornado Cash, these incentives appear to have been powerful, as its inflows dropped 68% within 30 days of its designation. This is all the more important because Tornado Cash is a mixer, and mixers are less effective at laundering money the less funds they receive. »

For its part, the Ethereum community takes seriously the censorship practiced on its blocks. Thereby, the Flashbots project, at the origin of this censorship, has unveiled several ideas to mitigate this phenomenon.

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Ethereum: Tornado Cash hit, but not sunk

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