Tornado Cash ban is likely to have long-standing consequences for the crypto space, widening the chasm between its closely monitored custodial part, and non-custodial one, which will become more decentralized and more anonymous.
The latter is necessary: taking away privacy services from the blockchain can be dangerous for average users.
Unlike banks, which in some way protect the users by their opacity and third-person approval of transactions, blockchain is transparent and any hostile actor skilled enough to trace a crypto address to a real-life person can take not only their funds, but also their life.
Unfortunately, the US Treasury is not preoccupied by such considerations, and it showed clearly that it intends to sanction not only users it suspected in money laundering, but also smart contracts enhancing on-chain privacy, together with all the people using it.
Since the ban, crypto industry (its non-custodial part) has been brainstorming as to the ways it can protect itself, and most solutions include a better decentralization on different levels: from interface to blockchain nodes’ hosting.
? While the companies behind the DeFi protocols like Aave cannot openly defy (pun unintended ?) the US government and are obliged to block the sanctioned addresses from using their interface, the smart contract behind it is still accessible by anyone, because it has been deployed on the blockchain. And the blockchain does not discriminate.
This means that users can interact with the command line, build their own interfaces, or split the access point between several parties (torrent-like). This is not a user-friendly way though, and making access to smart contracts easy and decentralized could be the new development direction.
? What about smart contract? If the protocol allows upgrades (most often via a vote of the related DAO), theoretically it could ban (and therefore forced to ban) sanctioned addresses. This means that DAO decentralization (clearly a pain point already, with founders still clinging to the majority of the voting tokens) must be taken seriously.
Also, smart contract’s developers are likely to become more anonymous. Last week’s arrest of Tornado Cash developer Alexey Pertsev, still in Dutch custody and unable to even speak with his wife, has created a dangerous precedent both for open-source software contributors (not to mention the freedom of speech in general).
?Finally, the blockchain itself must be made more decentralized. Messari has recently showed that over 52% of Ethereum nodes are hosted on Amazon Web Service, and 17% – on Hetzner. This makes the network potentially vulnerable to central points of failure, which means that nodes must find alternative hosting solutions: decentralized cloud, diversified data centers, self-hosting…
However shocking the OFAC’s decision was, it could be that the crypto industry will use it to become more resilient ✨
And that’s a good news.