Tornado Cash - Crypto Mixer on Ethereum

Not every one that engages in crypto mixing has committed a crime. Some people want to increase the privacy of their cryptocurrency transactions.

 

Keys Takeaways

  • Tornado Cash is a decentralized "Crypto Mixer" based on the Ethereum blockchain.

  • The purpose of cryptocurrency mixers or blenders is to make it harder to track individual transactions.

  • Not every one that engages in coin mixing has committed a crime.

  • On 8 August 2022, US Treasury imposed a sanction on Tornado Cash.

  • dXdY has blocked accounts with tokens that have a history of using Tornado Cash.

  • Circle has frozen $75,000 worth of USDC with ties to Tornado.


Introduction

Most cryptocurrency transactions are recorded on a public ledger where details such as the amount of cryptocurrency sent, sender's address, receiver's address, and date of transfer are logged and visible to anyone.


Anyone with or without owning any cryptocurrency or wallet can check transactions by searching the wallet or the transaction tx they want to track on the blockchain's explorer website. For example, if they wish to follow a Bitcoin or Ethereum transaction, they would go to Blockchain.com or Etherscan.


Of course, they cannot gather any more information other than the details mentioned above, like the identity behind those wallets. But with enough skills and determination, people have managed to link some of the wallets to its owner, specifically to influencers promoting scam coins.


What Is Tornado Cash

Tornado Cash is a decentralized "Crypto Mixer" based on the Ethereum blockchain. The purpose of cryptocurrency mixers or blenders is to make it harder to track individual transactions by mixing the source funds with other funds.


How Crypto Mixer Works

Coin mixers combine your cryptocurrency with a large pile of another cryptocurrency before returning the total amount you deposited minus 1% - 3% as fees to an address of your choice.


An alternate coin mixer system would require you to deposit your cryptocurrency into their private pool. They would then hand you a "passcode" to collect your deposit. You can then retrieve your deposit at another address with the passcode.


For example, Etherscan, which keeps track of all Ethereum transactions, will show that address A transferred ETH to a mixer and address B received ETH from a mixer. Nobody would know who sent ETH to whom, which results in dirty Ethereum being washed in the crypto mixing process.


Coin mixing is often compared to money laundering. However, not everyone that engages in coin mixing has committed a crime. Some people want to increase the privacy of their cryptocurrency transactions, such as Ethereum co-founder Vitalik Buterin, who uses it to securely send donations to Ukraine without the Russian government's knowledge.


Types of Crypto Mixer

There are two types of crypto mixers, centralized and decentralized.


Centralized - These companies offer an easy solution that will accept your cryptocurrencies and send back different cryptocurrencies for a fee. They hold records of the connections between transactions, but these records will not be made public. Meaning that the company could release those records to authorities in the future, revealing a user's connection to the coins.


Decentralized - These are protocols utilizing a coordinated or peer-to-peer method. The protocol allows a large group of users to pool an amount of crypto. For example, 100 people want to pool 1 Ethereum each and then redistribute it so that everyone receives 1 Ethereum, with no one knowing who got what or where it came from.


Are Cryptocurrency Mixers Legal

On 8 August 2022, US Treasury imposed a sanction on Tornado Cash. Basically, all Americans or entities are not allowed to use Tornado Cash. This sanction does not mean that the rest of the world is not affected.


dXdY, a decentralized exchange, has blocked accounts with tokens that have a history of using Tornado Cash. Circle, the issuer of USDC, has also frozen $75,000 worth of USDC with ties to Tornado. Github has also suspended Tornado's developer, its founder's account, and anyone that contributed to helping the open-source protocol.


Will More Exchanges Follow the Footstep of dYdX

Circle's move to freeze USDC was an eye opener, and many investors questioned if their USDC would be at risk in the future due to centralization. Some stated that this would be one of the most critical developments in DeFi history. The majority of people in the crypto space, retail investors, have no tools to check the history of all of the tokens swapped through peer-to-peer (P2P) decentralized exchanges such as Uniswap. It is not feasible for large exchanges to bar any tokens that have ties with Tornado Cash.