Ethereum Censorship Concerns Arise Amid Increasing OFAC Compliance

More blockchain operators are adhering to sanctions imposed by the Office of Foreign Assets Control (OFAC), which raises concerns about censorship among those who advocate for decentralization and participants in the network.

Toni Wahrstätter, an Ethereum researcher, pointed out that five of the six largest block builders on Ethereum’s blockchain are actively censoring certain transactions in accordance with directives from the Treasury Department. Many of these censored transactions come from the decentralized mixer Tornado Cash, a protocol that has been blacklisted by the Treasury due to its association with malicious activities, including those linked to the North Korean hacking group Lazarus.

Wahrstätter’s findings highlight censorship across three critical segments that support Ethereum’s network: validators, relays, and block builders. As blockchain technology evolves and cryptocurrency adoption expands, censorship has emerged as a significant concern. Advocates for decentralized networks often express their apprehension about the influence of centralized entities on operations that are meant to be decentralized.

Wahrstätter emphasized that the concentration of power among a limited number of network participants poses a risk to blockchain ecosystems. He stated, “Censorship resistance is key for political neutrality in blockchains. No single entity should control two-thirds of a blockchain’s content. Decentralization is essential; centralization at any layer of the stack may harm the whole ecosystem.”

To address the increasing issues of censorship and centralization on Ethereum, Wahrstätter proposed two potential solutions. The first involves creating an inclusion list that would help censoring entities manage OFAC-sanctioned transactions and recommend the removal of non-compliant operators. This inclusion list was conceptualized by Ethereum founder Vitalik Buterin and developer Mike Neuder in August 2023.

The second solution is the implementation of encrypted mempools, which would prevent entities from censoring on-chain transactions based on their origin or content. Buterin, a long-time proponent of privacy and decentralization, has also emphasized that censorship resistance is fundamental for any blockchain. He has critiqued the U.S. government’s stance on cryptocurrency regulations and their implications for various networks.