- Vitalik’s proposal seeks to give users compliant, anonymous transactions.
- The concept of “association sets” gave rise to censorship concerns.
- The Tornado Cash founders face up to 20 years in prison if convicted.
Balancing the fundamental right to privacy with regulatory compliance has long been a hot button in crypto. The issue became especially contentious after the Tornado Cash sanctions applied by the US Treasury in August 2022.
Addressing the issue, Ethereum co-founder Vitalik Buterin has co-authored a paper with academics and researchers titled ‘Blockchain Privacy and Regulatory Compliance: Towards a Practical Equilibrium,’ which put forward the concept of Privacy Pools.
Crypto Community Has Mixed Feelings
Privacy Pools refer to a privacy-enhancing protocol that utilizes zero-knowledge (ZK) technology to prove compliant transactions without users revealing their entire transaction history.
Co-founder and CEO of SpankChain, Ameen Soleimani, who co-authored the paper, labeled the proposal “an open-source project attempting to fix the most important flaw in Tornado Cash,” namely users being unable to verify that their funds originate from lawful sources.
Paradigm co-founder Fred Ersham reacted positively to the release, calling Privacy Pools the “most important tool” for the industry to meet regulatory compliance while maintaining privacy on public blockchains.
Not everyone shared Ersham’s enthusiasm, however. Bitcoin Developer Matt Corallo described Privacy Pools as “absolutely awful,” explaining that the concept contradicts cryptocurrency’s ideals, specifically in developing automated censorship tools.
Likewise, Decentralization Advocate Chris Blec drew a distinction between privacy and control, asserting that the privacy gained by Privacy Pool users would come at the expense of losing control. Blec went on to pan Buterin’s proposal as an attempt to “appease the tyrants,” and in doing so, he was “throwing Tornado devs under the bus.”
With global regulatory agencies actively watching crypto activity, the need for compliant privacy solutions is more important than ever, but can Privacy Pools deliver?
How Privacy Pools Work
Underpinning Privacy Pools’ compliant transaction history functionality is the additional concept of “coin IDs.” This refers to user-deposited funds from a legitimate source, backed by a “nullifier” that enables the funds to be spent anonymously later.
Upon spending funds, the user provides ZK proof that their withdrawal is associated with a previously created coin ID without revealing exactly which one.
The key innovation in Privacy Pools lies in users not having to prove their association with all possible coin IDs. Instead, the user provides an “association set” of pools of other users’ deposits. This acts as a way to satisfy transaction validity transparently while still obfuscating the precise details of an individual transaction.
Association sets can be constructed to satisfy different criteria, including allowing users to disassociate suspicious addresses.
On the Flipside
- Compliance-driven systems inherently favor state surveillance capabilities.
- Association set curation risks corruption, censorship, and discrimination.
- Privacy Pools operate counter to decentralized peer-to-peer networks.
Why This Matters
The Tornado Cash debacle demonstrated that safeguarding personal sovereignty is not a top priority for authorities. Consequently, there are lingering concerns that Privacy Pools may potentially be just another means of control.
Discover more on the Worldcoin pushback from privacy advocates here:
Worldcoin Draws Argentines in Droves Despite Privacy Backlash
Find out more on LastPass’ role in an ongoing wallet-draining hack here:
Suspected LastPass Breach Leads to $32 Million Crypto Heist
