How will the Tornado Cash sanction affect DeFi?

Due to the reasoning behind it as well as the way it was executed, it angered the crypto community and could be the precursor to a serious government crackdown on the industry.

Let’s take a look at the reasons for the sanction and what it could mean for the future of decentralized finance.

What is Tornado Cash?

Tornado Cash, launched in 2019, is one of the first fully decentralized applications on Ethereum to offer private transactions.

It achieved this by first accepting payments from users, combining them into a single address, and allowing users to withdraw funds to a second Ethereum address.

Due to the mixing of Ethereum addresses, it was impossible to determine who the original owner was.

Tornado Cash offered privacy-conscious people a way to invest and use cryptocurrencies without having their transactions automatically made public on Ethereum, which makes every transaction public by default.

The reasons for the sanction

With the help of Tornado Cash, over $7 billion in user funds have already been mixed.

Despite the majority of these transactions being entirely genuine and legal, there have been major hacks that have used the website to launder stolen money.

For example, the Axie Infinity Ronin Bridge hack, which happened in April 2020 and resulted in the loss of over $400 million in cryptocurrencies, was used to launder money through Tornado Cash.

Additionally, money was laundered through protocol following the Nomad assault and Harmony Bridge hack.

To make matters worse, the FBI has determined that the Ronin and Harmony breach was carried out by the Lazarus Group, a North Korean organization that has been sanctioned since 2019.

The Lazarus Group’s use of Tornado Cash was the primary justification provided by the United States for its decision to ban it.

The government took control of all of Tornado Cash’s addresses, including the addresses of its smart contracts and donation address, to sanction the decentralized app.

This means that anyone transacting using Tornado Cash could be charged with violating US sanctions.

The Furious Crypto Community

The move has drawn criticism from many in the crypto industry, who say it’s “throwing the baby out with the bathwater” and that it’s wrong to restrict a technology because it also serves certain purposes. undesirable purposes.

Additionally, the decentralized nature of Tornado Cash ensures that its smart contracts are always operational and usable and that its website, which is maintained through decentralized storage systems, cannot be shut down.

To completely shut down Tornado Cash, any government would have to shut down both the entire blockchain and the hundreds, if not thousands, of servers that host it.

Additionally, hundreds of Tornado Cash clones can be created, each with slight variations, due to the open source nature of the code and its availability to everyone.

The government and privacy advocates will engage in an endless game of cat and mouse if the decentralized app is banned.

Consequences of the penalty

The stablecoin’s parent company, Circle, instantly froze all USDC on Tornado Cash and blocked all associated addresses from using USDC when the ban was announced.

There has also been a lot of backlash that one of the biggest and most reputable stablecoins has the ability to instantly freeze anyone’s account.

The stablecoin is completely centralized and is managed by a company headquartered in the United States.

Some corporate executives fear that if the USDC is forced to freeze additional assets, it could trigger a domino effect that wipes out DeFi.

For example, USDC is used in Uniswap trading, Aave loan collateral, and as part of the Dai stablecoin peg.

If the government made the decision to ban all three DeFi pillars outright as the next step and the USDC agreed, the entire DeFi industry would instantly collapse.

In effect, decentralized trading would become impossible and money would be frozen.

One of the biggest threats to the future of decentralized finance.

Uncertain future

As long as the Ethereum blockchain is up and running, any allowed protocol, including Tornado Cash, will never completely perish.

This decade is going to be very important in terms of crypto law, and additional restrictions and penalties are bound to arrive.

Although it is not known whether this will have a significant effect on the market, it is obvious that once launched, these applications cannot be fully controlled.

This fact alone greatly improves the value proposition of Ethereum and other layer 1 blockchains.

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