What Is Tornado Cash And How Does It Work? - CoinNav

In August 2022, Tornado Cash gained attention as it faced sanctions from the U.S. for alleged involvement in laundering funds from cybercrimes, including a significant amount stolen by a North Korean state-sponsored hacking group.

Tornado Cash functions as a coin mixer, utilizing smart contracts for ETH deposits and allowing withdrawals to multiple addresses. By leveraging the liquidity pools within the Tornado protocol, the sender's identity becomes challenging to trace.

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What is Tornado Cash?

Tornado Cash is a decentralized privacy solution on the Ethereum blockchain, leveraging zero-knowledge proofs. It allows users to enhance transaction privacy by breaking links between deposit and withdrawal addresses.

With Tornado Cash, users deposit crypto and generate a secret hash through commitment. During withdrawal, the secret hash is used as proof of ownership while maintaining on-chain anonymity.

The protocol is community-based, with the developers relinquishing control through the Trusted Setup Ceremony in May 2020. This made Tornado Cash a fully decentralized protocol.

TORN is the native currency, serving as an ERC-20 token with a maximum supply of 10 billion coins. Holders can participate in proposals, vote for protocol changes, and earn Anonymity Points, which can be converted into TORN tokens.

 

Why Do People Use Tornado Cash?

The use of Tornado Cash stems from the need for enhanced privacy in the realm of blockchain transactions. While blockchain technology offers transparency, it also presents challenges in maintaining user anonymity. With the tightening surveillance measures and the potential risks associated with centralized exchanges, there is a demand for solutions that can provide privacy for digital assets.

While projects like Monero and ZCash offer privacy on their native networks, they are limited in providing privacy across different chains. This is where Tornado Cash comes into play. It was created to address the privacy concerns by leveraging smart contracts and decentralized protocols. Tornado Cash allows users to enhance their privacy by mixing their transactions within the blockchain, making it harder to trace their identity and link it to specific transactions.

 

How to Use Tornado Cash

Using Tornado Cash is a straightforward process that allows users to enhance their privacy on a public network like Ethereum. By following these steps, you can take advantage of Tornado's services:

1. Visit the Tornado Cash website.
2. Connect your web3 wallet and select the asset you wish to mix.
3. Deposit your coins and securely store the private key provided.
4. Confirm and sign the transaction.
5. Allow some time for the mixing process to occur.
6. When ready, withdraw your assets using multiple addresses for added anonymity.

To further protect your privacy, Tornado Cash recommends utilizing a virtual private network (VPN) to prevent third-party identification, clearing your browsing history, and avoiding immediate withdrawals after mixing to minimize address correlations. By following these precautions, you can fully leverage Tornado Cash's privacy-enhancing features.

 

How Does Tornado Cash Work?

Tornado Cash operates by breaking the link between deposit and withdrawal addresses, thereby enhancing the privacy of on-chain activities. Through the use of smart contracts, users can make ETH deposits and withdraw funds using multiple addresses. Additionally, the option to utilize a Relayer allows for withdrawals to addresses with no ETH balance, further bolstering privacy.

One of the key components of Tornado Cash's functionality is the utilization of zkSNARKs proofs, involving the Prover and the Verifier. The Prover aims to prove a hypothesis while the Verifier verifies the legitimacy of the Prover's claims, ensuring the anonymity of on-chain transactions.

Anonymity mining is another standout feature offered by Tornado Cash. Users who participate in liquidity mining contribute to the project's operations and are rewarded with Anonymity Points. These points are stored in shielded accounts, which conceal users' balances, addresses, and asset types. Once users accumulate the required number of Anonymity Points, they can exchange them for TORN tokens through Tornado Cash's Automated Market Maker (AMM).

It's important to highlight that Anonymity Points can only be claimed for used Tornado Cash notes. To receive rewards, users must demonstrate zero-knowledge proof on the protocol, allowing it to determine the appropriate allocation of Anonymity Points.

 

The U.S. Sanction on Tornado Cash

Tornado Cash faced significant repercussions when it was sanctioned by the U.S. Treasury on August 7, 2022. The Treasury accused Tornado Cash of repeatedly neglecting to implement effective controls to prevent the laundering of funds for malicious cyber actors.

The Office of Foreign Asset Control (OFAC), the regulatory agency responsible for imposing sanctions, confirmed the action, prohibiting U.S. crypto users and businesses from engaging with the protocol.

The Treasury alleged that Tornado Cash facilitated the laundering of more than $7 billion in cryptocurrency since its launch in 2019. However, a report by Elliptic, a cryptocurrency analyst firm, contradicted this claim, stating that only $1.5 billion of illicitly obtained funds from ransomware, hacks, and fraud were laundered through the Tornado Protocol.

Among the laundered assets were $445 million stolen by the Lazarus Group, a notorious North Korean hacking entity already under U.S. sanctions. The group was previously linked to major hacks, including the $625 million Ronin Network hack and the $100 million Horizon Bridge hack.

Additionally, the Treasury highlighted that Tornado Cash was used to launder nearly $7.8 million in stolen assets from the recent Nomad heist. Attackers exploited a severe bug to pilfer $100 million in cryptocurrencies, including ETH, BNB, USDT, USDC, and DAI.

The Treasury attributed Tornado Cash's failure to implement adequate measures for enabling hackers to exploit the platform for money laundering. They emphasized their commitment to sanctioning coin mixers that facilitate criminal money laundering activities.

 

Impact of the Ban on Tornado Cash

Tornado Cash experienced immediate consequences in the wake of the ban. The Treasury's blacklisting of Ethereum and USDC wallets connected to Tornado Cash, along with compliance from Circle and Github, had a significant impact.

The blocked addresses containing approximately $75,000 USDC, belonging to Tornado Cash investors, highlight the tangible effect of the ban. While Circle has not issued an official statement, evidence from a blacklisted transaction bot confirms the formal blockage of the addresses.

In response to the ban, Github took action by disabling accounts of Tornado developers like Roman Semenov and Alexey Pertsev. Other Github accounts associated with the Tornado Protocol were also deactivated, though it remains unclear if this was voluntary or enforced by Github.

Although Tornado Cash has been used for illicit purposes, it is also widely utilized by legitimate crypto users seeking to enhance their blockchain privacy. Supporters argue that Tornado is a neutral computer code, capable of both positive and negative applications, similar to internet VPNs. Some draw parallels between the Tornado ban and early internet email sanctions, emphasizing that email facilitated phishing attacks.

There are legitimate reasons for individuals to utilize Tornado Cash. For instance, cryptocurrency employees who value financial privacy can leverage the protocol for salary payments. Similarly, NFT artists seeking discretion after a successful sale can employ Tornado Cash to enhance on-chain privacy.

People living under oppressive regimes also turn to the Tornado Protocol to safeguard their privacy. Notably, Ethereum co-founder Vitalik Buterin publicly disclosed his use of the protocol to donate funds to Ukraine, ensuring the recipient entities remained shielded from rival surveillance.

Additionally, with the recent overturning of the Roe v. Wade case, individuals supporting the cause can use the Tornado Protocol to anonymize their contributions, protecting their identities.

Despite the ban's impact, the debate surrounding Tornado Cash continues, as users emphasize its value in safeguarding privacy and enabling lawful activities within the crypto space.

 

Key Takeaways from the Tornado Cash Ban

The recent ban imposed by the Treasury on Tornado Cash has brought several important aspects to light. Firstly, it showcases the US government's determination to regulate the cryptocurrency space as it moves closer to mainstream adoption. Critics argue that the ban unfairly targets a code rather than an organization, as Tornado Cash operates as a decentralized autonomous organization (DAO) governed by smart contracts.

Additionally, the ban reveals the government's preference for more centralized cryptocurrency systems that are easier to regulate. Platforms like Coinbase, which enforce KYC and AML rules, are less susceptible to such sanctions since they link cryptocurrency addresses to verified users.

As the crypto community awaits clear regulatory frameworks, individuals may face difficult choices. How much are they willing to compromise their values for widespread adoption? Should they cooperate with regulators or resist their influence?

Although many crypto enthusiasts haven't utilized privacy solutions like Tornado Protocol, the Treasury's ban encroaches upon Americans' rights to use privacy-enhancing tools for legitimate purposes.

In a show of protest, a business professor named Omid Malekan made donations through Tornado Cash to Planned Parenthood and a secret group aiding Ukrainian refugees with the assistance of Russians.

To highlight the challenge of enforcing the Tornado Cash ban on American citizens, a user has started sending small amounts of Ether to celebrities from a Tornado Cash wallet. This action underscores the difficulty of preventing individuals from sending crypto to publicly known wallet addresses, as the sanctions may encompass receiving funds from addresses associated with the app.

 

Conclusion

In a blockchain ecosystem where privacy is inherently limited, privacy-focused projects like Tornado Cash provide valuable solutions to safeguard your on-chain identity. Operating on the Ethereum blockchain, Tornado Cash effectively enhances privacy by pooling and transferring assets to new addresses, effectively severing the links to your on-chain activities.

It's important to note that while Tornado Cash significantly improves on-chain privacy, there may still be traces on your crypto address indicating the use of a coin mixer. This might attract attention from regulators and blockchain analysis firms, potentially raising questions about your past usage of such services. However, as long as your intentions were not malicious, such as engaging in money laundering, there should be no cause for concern.