Ethereum co-founder Vitalik Buterin has joined forces with core developer Ameen Soleimani, Chainalysis researcher Jacob Illum, and industry scholars Fabian Schar and Matthias Nadler to co-author a groundbreaking research paper.
In a move aimed at bolstering privacy on the Ethereum blockchain while navigating regulatory scrutiny, the paper introduces “Privacy Pools,” designed to serve as a compliant alternative to the now-blacklisted Tornado Cash.
The blacklisting of Tornado Cash by the US Department of the Treasury, in collaboration with the Department of Justice (DOJ) and the IRS, sent shockwaves through the cryptocurrency community. Its developers, Roman Storm and Roman Semenov, were accused of laundering over $1 billion for the notorious Lazarus Group, a North Korea-linked hacking entity.
In response to these allegations, Vitalik Buterin and his collaborators are now working on a replacement protocol hailed as “regulation-friendly.”
We explored new compliance opportunities made possible by https://t.co/Nt4b2Tgx1D, where users can provably dissociate from illicit funds.
story below 🧵👇 pic.twitter.com/Tq0zYfbwlL
— Ameen Soleimani (@ameensol) September 6, 2023
Vitalik Buterin And Privacy Pools: A Novel Approach
Privacy Pools represent a novel smart contract-based privacy-enhancing protocol that promises to replicate and improve upon the core functionality of Tornado Cash. Like its predecessor, Privacy Pools will enhance transactional privacy on blockchains, ensuring that complete transaction histories remain concealed.
ETHUSD trading at $1,631 on the daily chart: TradingView.com
However, the groundbreaking aspect lies in Privacy Pools’ ability to employ zero-knowledge proofs to trace the source of funds without revealing specific transaction details. In essence, it can determine whether funds are sourced from illicit origins without compromising user privacy.
The abstract of the research paper succinctly encapsulates the core concept: “The core idea of the proposal is to allow users to publish a zero-knowledge proof, demonstrating that their funds (do not) originate from known (un-)lawful sources, without publicly revealing their entire transaction graph.”
A Response To Past Controversy
Tornado Cash’s downfall began when it faced legal challenges related to its alleged facilitation of transactions for the Lazarus Group, a group notorious for its cyberattacks and financial crime activities. In August 2022, the US Treasury Department’s Office of Foreign Assets Control officially blacklisted Tornado Cash due to its purported involvement in illicit activities.
With Privacy Pools, Vitalik Buterin and his team aim to not only restore privacy in Ethereum transactions but also ensure that users can do so while adhering to regulatory guidelines. This collaborative effort represents a crucial step forward in reconciling the ideals of blockchain privacy with the legal expectations of authorities, paving the way for a more inclusive and secure cryptocurrency ecosystem.
In the rapidly evolving landscape of blockchain technology, Privacy Pools may stand as a testament to the community’s commitment to innovation, compliance, and privacy, all while addressing the challenges posed by illicit actors.
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Featured image from Fusion Security