Stop picking on the DeFi founders because they followed the Tornado Cash Sanction

The decentralization debate

All of this is part of a debate that has been going on for a long time about what parts of "decentralization" can be given up for network growth and long-term viability. It also shows the different strategies of those who want to work within the law and those who want to build around it.

Last week, a number of well-known DeFi projects, like the decentralized exchange dYdX and the Aave platform, said they had started blocking Tornado Cash-related crypto wallets from using their front-ends. Other companies, like the NFT (non-fungible token) marketplace OpenSea, have probably started doing the same thing, but they haven't said so publicly.

According to dYdX, this is because crypto compliance software providers like Chainalysis or Elliptic found a "sudden influx" of accounts that had been flagged. At this point, we don't know how much the authorities will enforce the penalty, which is broad enough to affect any address daisy-chained to Tornado, whether it's a sender or a receiver.

Even though only a small percentage of wallets have a direct link to Tornado Cash, almost half of the Ethereum network is only "two hops" away from an address that received funds from Tornado. An anonymous researcher at data shop Block119 named ElBarto Crypto called this the "six degrees of Tornado Cash."

"Everyone who criticizes DeFi companies for using compliance tools should host the Uniswap front-end on their domain without blocking," dYdX founder Antonio Juliano tweeted over the weekend. He said that in a funny way to get people to think about the risks of running a website that doesn't follow the rules, but the same idea has been put forward as a real solution.

People have used the word "bootlicker" to describe what Uniswap, Aave, and others have done here. And in some ways, they have reason to be angry. At the most basic level, these apps are breaking ETH's ability to be used anywhere by making "compliant" tokens and "gray market" tokens that can only be used in certain places. They do this to limit their own potential liability.

DeFi is meant to be an alternative to the current economic system. It offers many of the same financial services (and a few new ones) without the need for middlemen. Without permissionless access, crypto risks just being a more complicated way to do what we used to do. People might wonder what makes DeFi different from banks if all of its entry points start to report and block transactions.

But there is another way to look at the situation, and it starts with making front-ends less important. Most users don't use the command line; they only use Uniswap.io. This is the problem. Users of DeFi shouldn't depend on protocol founders to build user interfaces, since they are already taking on other risks.

Chief Daniel Roberts said that this was a "litmus test" to see who really cared about DeFi. But it seems like a false distinction based on words that is asking developers to run straight into legal trouble. Ethereum, on the other hand, doesn't need websites to work.

Eric Wall, a well-known crypto investor and person, said, "Let them censor. Let them follow the rules. Let them keep working in the open so the government can't say they did anything wrong." He also said, "It is OUR job to make sure there are other ways to get to the back ends if the first ones fail." That's something that's easy to do, doesn't take much planning, and doesn't need Aave's help."

I don't know what it would take to build a huge number of "decentralized" front-ends that all work together, but I think it's unlikely. But so are DeFi's final moments. I think it would take a "community" to really cut financial giants and the government out of an economy.

Everyone who wants to should share the risk of hosting easy access points to DeFi services. That would strengthen the ecosystem's "social decentralization," assuming that everything works technically as promised. This process could make it take longer for people to start using crypto. You might not be able to find a website by searching for the name of a protocol. Instead, you might have to "torrent" a service or use a version of an app with a similar name that sounds kind of sketchy at first. If people can't keep up with their websites, "link-rot" is likely to happen. You may have to do some research to find out which sites are still being updated and can still be trusted.

Rune Christensen, the founder of MakerDAO, the company that makes the dai stablecoin, said last week that the U.S. ban will likely bring DeFi into a "new age." In the pre-sanction period, the main goals were to get more users and grow the protocol. In the new period, decentralization would be the main goal. What this means is still being worked out, but Christensen said Maker could stop tying its stablecoin to the U.S. dollar, which would be a big change from what it is doing now.

In the same way, protocol developers should work even harder to make their systems resistant to attacks from the outside. The key is to keep the back end working and accessible at all times, while also following the law.

Protocols should still have some kind of front-end, but they should be completely clear about what information they collect and how it can be used. If the Tornado Cash ban isn't overturned, it's likely that crypto surveillance software will become more useful and less troublesome.

Part of the recent backlash comes from the fact that so many people couldn't use apps they were used to, even though they don't think of themselves as trying to get around sanctions or launder money. Gabriel Shapiro, a lawyer for crypto companies and DeFi projects, said that the financial compliance software they use now is "blank weapons."

These systems, which were made by companies like Chainalysis, look for any connection to Tornado, no matter how or why it was made. There are definitely good reasons to use a transaction anonymizer.

Before the ban last week, the people who worked on Tornado took steps to limit who could use the web-based service they made. Some people said that the move was bad because it went against the point of the project and led to more surveillance of the network.

Others saw it as a way to get closer to compliance after a well-known crypto hack was used to launder money through Tornado. Even though they didn't end up going that way, it doesn't change the fact that Tornado is still up and running.

Just as interesting is the fact that the Tornado DAO is still trying to run the project. This past weekend, it voted unanimously to add signatories to the $22 million treasury to make the project more secure in case people are arrested. Even though the project's Discord and GitHub were shut down, it did so.

Front-ends can be watched, shut down, hacked, or put on a blacklist without changing what's behind them.

 

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