What is Tornado Cash?

Tornado Cash, known for its innovative approach to financial privacy on the Ethereum blockchain, is celebrated for its unique properties but also faces significant scrutiny. While the service’s uniqueness is undisputed, its legality remains a hot topic among both users and regulators. In this article, we delve into the workings of Tornado Cash, exploring the reasons behind its contentious nature and why, despite the controversies, it continues to hold a firm place in the crypto community’s arsenal.

Understanding Tornado Cash

Tornado Cash is a decentralized privacy tool on the Ethereum blockchain. It allows anonymizing Ethereum and cashing ERC-20 token transactions. Tornado Cash is not a cryptocurrency to process transactions on its own – it is a non-custodial protocol that utilizes mathematical algorithms to make financial operations confidential and untraceable. In particular, Tornado Cash uses a system of pools for each supported cryptocurrency. Pools are disassembled and assembled back with different participants involved. This disrupts the connection between the source and exit of cash transactions for users. The protocol does not require registration, and the thrown out coins cannot belong to the same user.

Tornado Cash was initially based on Ethereum but has already swapped to nodes for an array of currencies on their blockchains, including BNB Chain and others. The solution was launched in response to the growing demand for anonymity, and its primary vision was supporting the Ethereum token. However, over time, the operators managed to offer additional systems based on wider cryptocurrency. Tornado Cash operates via the blockchain using smart contracts, immutable code by virtue of which the protocol cannot be conducted, precluding it from acting fatally. Still, there are parts like routing contracts and token governance, the approval mechanism for which is within the remit of the community. To this end, the platform relies upon the TORN token.

Nevertheless, the instrument is still heavily criticized. In 2022, the US Treasury’s Office of Foreign Assets Control added Tornado to the sanctions list. Naturally, a great many deal with the service with the aim to engage in shady dealings. That also poses the question of the balance of the privacy right with the KYC one.

Legality of Tornado Cash

The legality of Tornado Cash is a complex and nuanced topic. In August 2022, the U.S. Treasury’s Office of Foreign Assets Control (OFAC) sanctioned several Ethereum addresses linked to Tornado Cash. This move targeted the platform’s ability to operate by blocking access to its pools used for depositing and withdrawing funds.

Tornado Cash’s primary feature is the anonymity it offers, which, while beneficial for privacy, also creates potential for misuse. Notably, it has been exploited by groups like the Lazarus Group, connected to North Korea, to launder stolen funds. Such incidents have heightened regulatory scrutiny and led to debates over the ethical and legal implications of such privacy tools.

Following the sanctions, an event known as ‘dusting’ occurred where some individuals in the crypto community sent small amounts of ETH from Tornado Cash to public wallets of well-known crypto figures. This act of protest demonstrated the challenges in regulating decentralized platforms, as recipients of these funds became unwittingly linked to a sanctioned entity, leading to complications like frozen accounts on crypto exchanges.

In essence, while Tornado Cash offers significant privacy enhancements, its use and legal standing are subjects of ongoing debate, influenced by instances of misuse and broader discussions about privacy, security, and regulation in the crypto ecosystem. And while the legality of using an anonymizing service is shrouded in a haze of uncertainty, what is known for sure is how Tornado Cash works.

Mechanics of Tornado Cash

So how does Tornado Cash work? As we have already learned, Tornado Cash is a decentralized protocol on the Ethereum blockchain providing its users with privacy using a technique known as zero-knowledge proofs. The operation of this protocol can be explained step by step, as follows:

• Deposit phase: To begin with, a user makes a deposit of Ethereum (ETH) or other ERC-20 tokens currently supported. This process goes through the use of Tornado Cash’s smart contract which is organized as a pool matching the funds from different deposit sources. This way, funds are mixed, and there is no direct trace to the originating source. The smart contract generates a cryptographic proof or “hash” for the deposit, which is necessary for the subsequent withdrawal of funds. Withdrawal of the deposited amount may only be accessed using this cryptographic proof and by the user who made the deposit, while keeping him anonymized.
• Withdrawal phase: To withdraw the deposited funds, a user has to present the generated cryptographic proof of drawing them. The withdrawal is made, both, to an unrelated Ethereum address and in combination with certain precautions, such as using a Relayer service, which makes the transaction anonymous and cuts all trace to the user’s employed address.
• Zero-knowledge proof mechanism: The aspect of Tornado Cash’s functionality that assures anonymity of users is the zero-knowledge proof mechanism, with the specifically used ZK-SNARKs. The smart contract then employs these proofs without exposing any further information to identify the actual user, merely acknowledging the legitimacy of the withdrawal demand without seeing any details regarding the transaction.

• Anonymity mining and governance: Tornado Cash users might take part in a rewarding process, including the minting of TORN governance tokens and their application to the protocol voting system. Overall, Tornado Cash provides its user with a viable solution to cover Ethereum transactions, enabling the user to pursue financial activity without any threat of his identity being exposed or other problems identified in the transaction.

Comparative Analysis: Tornado Cash vs. Alternatives

Tornado Cash is a prominent player in the privacy-centric sector of crypto services, but it’s not the only option available. Alternatives like UniJoin, Coinomize, MixBTC, 0xMonero, Cyclone Protocol, and Spinner also provide varying degrees of anonymity and privacy for crypto transactions, each with unique features and operational models. Here is a comparative analysis of Tornado Cash and its alternatives in the privacy-centric sector of crypto services:

While Tornado Cash offers high-level anonymity with decentralized governance, alternatives like UniJoin and Coinomize provide temporary custodial services with a focus on user anonymity. MixBTC, although user-friendly, limits its services to Bitcoin. 0xMonero and Cyclone Protocol extend privacy features to Ethereum and other blockchains, with Cyclone offering cross-chain functionality. Messier 87 focuses on decentralized DeFi applications, aiming for a wide adoption of privacy solutions in the crypto space.

Motivations Behind Tornado Cash Usage

Tornado Cash users are motivated by the desire for financial privacy, as the platform offers anonymous transactions that protect users’ financial data. This privacy is secured through advanced cryptographic methods, making transactions secure and untraceable. The service is open-source and permissionless, allowing anyone to use it without needing special skills or knowledge, and it integrates with other DeFi protocols for broader utility.

On the other hand, the idea of ​​anonymity also attracts hackers and troublemakers trying to cleanse the from which illegal funds come. For example, large-scale cryptocurrencies attacks were laundered in Tornado Cash as well. This legally controversial service is in high demand as it has a big anonymity code, true for both good and evil; this shows the dual-use nature of privacy tools in the digital age.

TORN Token and its Significance in the Tornado Cash Ecosystem

The TORN token is a governance token in the Tornado Cash ecosystem. It is one of the main tokens used in decision-making processes. There are 10,000,000 tokens in total on Ethereum. Holders are able to influence the platform’s development process through voting on proposals executed by Tornado Cash’s governance smart contract TORNs were initially distributed on December 18, 2020. According to the official information, 5% went on airdrop, 30% of total TORN supply was allocated to the team, 10% for anonymity mining, and 55% is in the DAO Treasury. In addition, a number of actions can be performed with the help of TORN holders’ consensus such as adding new pools, pausing the contract, increasing or setting new reward rates, and even changing router addresses.

The system’s design requires an exceedingly large amount of TORN to create and vote on proposals. As a result, the number of entitled participants is significantly minimized, meaning that the system is governed only by committed users In other words, the governance system is designed in a way that gives token holders opportunities to control and develop the protocol while ensuring that those who are making these decisions are genuinely interested in the platform’s well-being. However, recently in May 2023 a hacker managed to take over TORNs thus taking the governance control over Tornado Cash, revealing the token’s vulnerability.

User Guide for Tornado Cash

In order to use Tornado Cash, a Web3 wallet with some amount of ETH is needed. MetaMask is a suitable option Further is instruction how to handle the workflow: 

1. Open the Tornado Cash webpage on the website: https://tornado.cash/. For this purpose, click on the “Mix” feature. 
2. Secondly, in order to connect a Web3 wallet with the service, press the “Connect Wallet” sign. 
3. Indicate the amount of ETH and push using the “Deposit” feature. 
4. Thirdly, assess it is correct with the mixing payment and the minimal sum that is possible to deposit, and press “Approve” for starting jacking. 
5. The subsequent situation is crucial in implementing Tornado Cash – the client’s ETH will mix it with another user’s summation. It may require a few minutes. 
6. When the whole mixture has been performed, with “Withdraw”, the mixed ETH may be reverted. 
7. Press “Submit” to complete the withdrawal.

Conclusion

To sum up, Tornado Cash is a prominent player in the Ethereum-based tools for privacy, although it has its drawbacks. On the one hand, while the service provides strong anonymity, its use by rogue actors and the resulting bans affect the reputation. Therefore, the future of Tornado Cash is currently under question as it deals with innovating and dealing with the scrutiny at the same time.

FAQs

What is the primary purpose of Tornado Cash?

Tornado cash is primarily used for enhancing financial privacy. It allows its users to make transactions on the Ethereum blockchain, in which the sender’s and the receiver’s links are disconnected and thus are untraceable.

Is Tornado Cash legal to use?

The legality of using Tornado Cash depends on what jurisdiction it is operating in, as it is banned in the United States, and thus in that jurisdiction, using the service for the purposes in which it was intended is illegal. In other countries, use of the platform is subjected to local laws and customer policy.

How does Tornado Cash differ from other privacy solutions?

Tornado Cash is different from other privacy solutions in the fact that it utilizes zero-knowledge proofs for ensuring transaction anonymity and in its operational model. Being a decentralized and non-custodial privacy solution, the platform operates on Ethereum, while many other services require central custody and operate on separate blockchains.

What are the risks associated with using Tornado Cash?

Risks associated with using Tornado Cash are the potential legal implications, particularly over sanctions and the possibility of personal interests being tracked since the system enables nefarious money launderers to clean ill-gotten funds.

Disclaimer: Please keep in mind that the content of this article is not financial or investing advice. The information provided is the author’s opinion only and should not be considered as direct recommendations for trading or investment. Any article reader or website visitor should consider multiple viewpoints and become familiar with all local regulations before cryptocurrency investment. We do not make any warranties about reliability and accuracy of this information.