This post was originally published on this site
https://content.fortune.com/wp-content/uploads/2022/08/Coins-Ethereum-1.jpg
The Ethereum community, which is known for a sunny rainbow-and-unicorns vibe, is unusually serious as of late. Following a recent move by the U.S. Treasury Department to target a batch of crypto-related open source code, one word keeps coming up in Ethereum circles: censorship.
The concern surfaced earlier this month when the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash, an Ethereum-based cryptocurrency “mixer” that allows users to obfuscate transactions, and a series of Ethereum addresses—banning all Americans from interacting with both the mixer and the addresses.
According to Treasury officials, Tornado Cash has laundered over $7 billion in cryptocurrency since its creation in 2019, and has become a favorite destination for the infamous North Korean hacking outfit known as the Lazarus Group.
The Tornado Cash announcement marked a “watershed” moment for the crypto world. Although the Treasury has long targeted financial criminals and those who support terrorist activity, it’s unusual for the agency to sanction a piece of technology—in this case a mixer—directly.
All of this set off concern within the Ethereum community about whether the blockchain is resistant to government censorship —concern that has only increased as Ethereum approaches its highly-anticipated “merge” upgrade next month.
Can Ethereum avoid censorship?
Though applications existing on Ethereum can be censored, as we’ve seen with Tornado Cash, whether the Ethereum blockchain itself can be subject to censorship has been a topic of debate, especially with Ethereum’s upcoming merge.
That’s because the merge will shift Ethereum from a proof of work (PoW) consensus model to proof of stake (PoS), and in turn, validators will have the responsibility of creating new blocks on-chain and verifying transactions, rather than miners. To become a validator, one must deposit 32 Ether—a sum, currently worth around $50,000, that is intended to ensure that participants have a stake in the success of the network.
A single entity, however, can also run multiple validators, so long as they can afford it and, in doing so, arguably garner more control. As a result, some within the Ethereum community have become concerned about the emergence of powerful, centralized entities after the merge–entities that could be pliant when it comes to carrying out government censorship requests.
Those concerned about censorship have raised various hypotheticals: Might a validator refuse to confirm a block to the Ethereum blockchain because it contains Tornado Cash transactions? Would fear of legal repercussions lead them to ignore or reject such blocks?
It is unknown whether any of this will happen, or whether the government will target validators, but such questions have been the center of debate online—especially as it circulated on crypto Twitter that “66% of the Beacon Chain [or proof of stake chain] validators will adhere to OFAC regulations,” including Coinbase and Kraken.
Ethereum creator Vitalik Buterin weighed in on this discussion himself, and signaled his support in slashing the stake of any validators that censor the Ethereum protocol if asked by U.S. regulators.
Even Coinbase CEO Brian Armstrong suggested he’d rather stop the staking business of his cryptocurrency exchange than comply with any potential censorship.
Another concern post-merge involves “MEV”—Maximal Extractable Value (formerly Miner Extractable Value)—and potential “MEV-Boost” issues, and how these could increase the potential for censorship.
MEV describes the profit a validator can earn by selecting or reordering transactions within blocks, while MEV-Boost is an optional software built for proof of stake Ethereum.
MEV-Boost allows validators to outsource block production to maximize their reward. Though there are upsides to MEV and MEV-Boost, both can also be used by bad actors in a malicious way. Specifically, some within the Ethereum community are worried about censorship of MEV-Boost “relay operators,” or entities that connect validators to block builders—the fear is that the existence of these relay operators offers a big new target for censorship.
The concern is so widespread that it was addressed during the most recent Ethereum Core Developers meeting.
“If we allow censorship of user transactions on the network, then we basically failed. This is the hill that I’m willing to die on,” developer Marius van der Wijden said during the call. “If we start allowing users to be censored on Ethereum then this whole thing doesn’t make sense and I will be leaving the ecosystem.”
Most Ethereum developers, however, sounded hopeful that potential MEV-related issues, especially involving censorship, would not be prevalent threats, and remained focused on building Ethereum as a censorship-free protocol.
While some may take the topic more seriously than others, experts in the cryptocurrency space don’t believe censorship-related fears are overblown, especially if blockchains are more widely used by normies as time goes on.
“If crypto is going to go mainstream … it’s going to have to exist within a modern regulatory framework. That means adhering to OFAC sanctions, allowing for strong protections from money laundering, and so on,” Matt Hougan, Bitwise CIO, tells Fortune. “The question vis-a-vis ETH validators, however, is whether that adherence should occur at the foundational technological layer, or on the application and user side.”
Hougan made an analogy involving the internet, asking whether libel and hate speech should be banned by the internet itself, or handled at the user and application layer instead. “History suggests that freedom, innovation and growth are best served when technologies are allowed to be credibly neutral, and we police bad acts by policing bad actors,” he said.
And though the merge hasn’t happened yet, we’ve already seen forms of censorship on Ethereum in a few ways.
Ethereum infrastructure companies Infura and Alchemy have blocked access to Tornado Cash. Circle, the company behind the popular USDC stablecoin, froze Tornado Cash-linked addresses. Uniswap, the largest decentralized exchange on Ethereum, has also reportedly blocked Tornado Cash-linked addresses. Even Ethermine, the largest Ethereum miner, stopped processing Tornado Cash transactions, being dubbed the “first hard evidence seen of censorship actually happening in block production,” online.
Looking ahead, only time will tell how, or if, censorship resistance is maintained.
Some online predict the decentralized finance (DeFi) space will continue to split into two: One being a “regulated,” compliant version of DeFi, and the other being “badlands” DeFi, as Gabriel Shapiro, general counsel at Delphi Labs, wrote on Twitter. “[M]ost blue-chip projects will embrace the former.”
To Hougan, “an interesting part of this process is that the Ethereum community is determining through discussion how important decentralization is as a core value. Different blockchains will decide on different answers to this question, and it will be interesting to see which answer the market rewards and punishes.”
Until then, the debate surrounding censorship on Ethereum is likely to get louder.
