Tornado Cash Alternative Explored in Paper Co-Authored by Vitalik Buterin

Co-founders of Ethereum, Vitalik Buterin, along with core developer Ameen Soleimani, Jacob Illum from a leading blockchain analytics firm, and scholars Matthias Nadler and Fabian Schar, have collaborated on a research paper introducing a new privacy protocol called “Privacy Pools.”

This paper offers a framework that aims to serve as a successor to Tornado Cash, a privacy-focused service that has faced regulatory challenges recently.

Privacy Pools is designed as a “smart contract-based privacy-enhancing protocol” that seeks to find a balance between financial privacy and regulatory compliance. By employing advanced cryptographic techniques, such as zero-knowledge proofs, the protocol allows for the verification of user funds without disclosing their entire transaction history.

At its core, Privacy Pools introduces the concept of a “separating equilibrium,” a term defined by the authors to illustrate a system that distinguishes between illicit and legitimate funds while adhering to regulatory requirements. This enables users to engage in private financial transactions that are also compliant with the law, addressing a significant challenge in the blockchain industry.

The authors draw parallels with Tornado Cash, which previously occupied a significant role in enhancing transaction privacy. While Tornado Cash provided privacy for its users, it found itself at the center of legal issues due to allegations of facilitating transactions linked to a North Korean hacking group. As a result, in August 2022, it was blacklisted by the U.S. Treasury Department’s Office of Foreign Assets Control, underscoring the need for a solution that effectively integrates privacy and regulation.

The introduction of Privacy Pools is seen as a potential game-changer for financial transactions within the blockchain framework. The authors propose that a successful integration of privacy and regulations could prove beneficial for the long-term sustainability of the cryptocurrency sector.

If implemented effectively, Privacy Pools could offer a much-needed framework for financial privacy that remains compliant with regulatory standards.