What is the Tornado Cash mixer and why was it blocked?

 What is the Tornado Cash mixer and why was it blocked?

The main thing

Tornado Cash is a decentralized protocol that made it possible to anonymize transactions on the Ethereum network and a number of other blockchains.

According to analyst firms, this protocol has been a popular way to launder cryptocurrencies associated with cybercrime. Because of this, in August 2022, Tornado Cash fell under US sanctions, and the co-founder of the service Alexey Pertsev was arrested in the Netherlands. Tornado Cash repositories on GitHub have been removed, and users' crypto assets totaling more than $430 million have been blocked.

In September 2022, following community outcry, US officials allowed individual users to withdraw cryptocurrencies from blocked addresses if they could prove their legitimacy.

The Tornado Cash user group filed a lawsuit against the US authorities in a Texas court, accusing them of abuse of power. Human rights activists and representatives of the crypto industry also point to this.

Project development history

The Tornado Cash protocol has handled assets worth over $3.5 billion and earned over $17.7 million in fees during the course of its existence. Over 57 000 different users simultaneously used it.

During 2021, Tornado Cash smart contracts were deployed on other popular blockchains: BNB Chain, Polygon, Avalanche, Gnosis, Arbitrum, and Optimism. However, the maximum volume of deposits was still accumulated in the Ethereum network.

In December 2021, Tornado Cash announced the launch of a major update to Nova , which ran on the Gnosis network and, unlike the original protocol, allowed arbitrary amounts of ETH to be deposited and withdrawn while maintaining privacy and providing a "shielded" transfer of funds in pools.

Who created Tornado Cash

The Tornado Cash decentralized service was created by developers Roman Storm, Roman Semenov and Alexey Pertsev. They claim to have experience with blockchain projects and are co-founders of the cybersecurity business PepperSec.

On the Ethereum blockchain, the Tornado Cash protocol was introduced in August of this year. Regarding outside investments in the project, nothing is known. Additionally, no token sales were performed to pay for the service.

Through a multisig wallet, the protocol's creators kept control of it during the initial phase. But in May 2020, after the launch of the second version of the protocol, in order to increase the level of decentralization, the team burned access keys to smart contracts. More than 1,100 users took part in the so-called trusted installation procedure , including Vitalik Buterin and Gavin Andresen.

The Tornado Cash user interface code was stored in IPFS , which reduced the risk of data deletion, including in the event of legal prohibitions. As long as the interface is saved by at least one user, it will function.

What was the TORN token for?

On the Ethereum network, Tornado Cash has its own ERC-20 TORN governance token.

The 500,000 TORN airdrop was made to early adopters in February 2021. More than 7,500 addresses joined the distribution as participants. On average, early adopters got 38 TORN each. At the time of the start of public trading of the token on exchanges, their value was more than $7,700.

The TORN governance token had three functions:

pledge for repeaters;

staking;

involvement in the Tornado Cash DAO decentralized organization.

To place your offer in the Tornado Cash DAO, you had to have at least 1000 TORN. Only 1 TORN was enough to vote. Each token counts as 1 vote.

Suggestions could include:

adding new pools;

changes in remuneration rates;

distribution of DAO treasury funds.

Each proposal is on the vote for 5 days and for its adoption it was necessary to receive at least 25 thousand votes-tokens.

How Tornado Cash worked There are many mixers that are used for anonymous transfers of cryptocurrencies. The majority of them, meanwhile, are centralized services that risk abusing customers' confidence by taking their money or private information. Unlike them, the Tornado Cash protocol was built on the principle of decentralization, that is, it was a set of smart contracts with which users interacted through Web3 wallets. Contracts accepted deposits and mixed them in one pool, for which zk-SNARK technology was used . That is, transactions occurred without disclosing information about the payments themselves, and all assets were anonymized and not associated with a specific owner. From the user’s point of view, everything was extremely simple: he sends a crypto asset to a smart contract from one address and then withdraws it to another address that is in no way connected with the sending address. A private letter is written after the money has been transferred. It functions as the private key required to withdraw money to another address.

What part does Tornado Cash play in the laundering of stolen cryptocurrency?

The creators of cryptocurrency mixers assert that their work is crucial in preserving users' and investors' anonymity. Law enforcement agencies, however, assert that these services are frequently used to launder the money of organized crime.

There are numerous instances of Tornado Cash being utilized as a "laundry" for crypto assets that have been stolen over the course of its operations. Here are just a few cases for 2022:

A $15 million theft from the Singapore-based Crypto.com business occurred in January 2022, and 4,600 ETH were "scrooled" through Tornado Cash.

In March, one of the biggest thefts in the history of the cryptocurrency business allegedly involved North Korean hackers stealing assets from the well-known P2P game Axie Infinity worth $625 million. This sum was at least partially cleaned up using Tornado Cash.

The Harmony ecosystem's Horizon cross-chain bridge was compromised in June. The assailants took property worth roughly $100 million, the most of which went to Tornado Cash.

In July, the Omni lending protocol's assets totaling more than 1300 ETH (or roughly $1.48 million) were taken and sent to the mixer.

According to Chainalysis, a blockchain transaction analysis company, more than $3.5 billion has passed through this mixer during the operation of Tornado Cash, of which up to $1.2 billion istied in a direct way to stealing, hacking, and other illicit activities.

Elliptic experts claim that Tornado Cash was actively used to launder money received from NFT fraud.

Why Tornado Cash was sanctioned

In August 2022, the mixer, along with its associated Ethereum and USDC addresses, was placed on the OFAC sanctions list . The blocked wallets contained stablecoins, WBTC and ETH for a total of approximately $437 million. Later, USDC was blocked at the mixer’s addresses by their issuer, the American company Circle.

The reason for the block was the use of Tornado Cash for money laundering: according to the US authorities, since the creation of the service, the attackers have laundered more than $ 7 billion through it . The mixer was actively used by hackers from the North Korean group Lazarus.

As a result of the sanctions, all property, user funds and source code of Tornado Cash in the United States and abroad were blocked, and residents and citizens of the country were prohibited from using the service.

In addition to the cryptocurrency, the repositories of Tornado Cash and their founders in Github, RPC Infura and Alchemy Platform, as well as some domains, were blocked (in fact, deleted). The Tornado Cash website and associated services ceased to function as a result. More than 250 addresses at the front-end level have been blocked by the Uniswap decentralized exchange.