How Ethereum & DeFi May Be Impacted

Leading figures and individuals in the cryptocurrency have lent their voices for justice calls for the arrested developer of Tornado Cash.

Earlier in August, the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) added Tornado Cash to the list of specially sanctioned entities due to its connection to Lazarus Group, a North Korean notorious force behind major money-laundering activities.

A few days after the sanction order, Alexey Pertsev, the developer of Tornado Cash, was placed under arrest on suspicion of, “involvement in concealing criminal financial flows and facilitating money laundering.”

It’s been the first time authorities have taken tough stances against an open-source code, in other words, imposed sanctions on a technology.

People Still Have Some Rights

Concern has been expressed about the injustice in the detention of Alexey Pertsev by the Dutch authorities. Last Saturday, a protest against the detention was held by a group of dissidents in Amsterdam’s Dam Square, demanding a clear answer on what Pertsev has been involved in.

Some of the prominent names in crypto have raised voices in defense of the developer. Cardano founder Charles Hoskinson stressed that developers have no control over what users do with the software. They simply write the codes.

To wit,

“The protocol in developer understanding that we have as developers is that when we write code, it’s an expression. As long as we don’t get involved in the running and use of that code for purposes, we’re just writing it; it’s like writing a book.”

Legal control on the Tornado Cash privacy protocol has made the crypto supporters and Ethereum community question the possibility that ETH will come under regulatory control when it comes to Proof-of-Stake.

New Threats Emerging

Some analysts say the Tornado Cash event shows the threat of privacy censorship becoming more obvious with the same long-term impact as the LUNA event.

These concerns resonated with a number of other causes that pushed the greed and fear index for Ethereum down to 35 today – the community is in fear.

Tornado Cash is a protocol that functions on the Ethereum blockchain; and Ethereum is moving from Proof-of-Work to Proof-of-Stake.

Unlike PoW, the more coins a user holds, the more power they hold on the network. Users of exchanges that allow staking Ethereum or any other PoS coin are essentially unsecured creditors for lending money to the platform without any collateral.

The key point here is that these staking organizations play an important role in validating transactions on Ethereum. So what if some of these entities are forced to comply with OFAC regulations?

Many Questions Remain

A lot of people have pointed out that over 66% of validators on Beacon Chain are organizations based in the U.S., meaning that once OFAC wants to jump into control, these organizations will have to obey the laws as ordered.

The list includes Lido Finance, Coinbase, Kraken, Staked Finance, and Bitcoin Suisse.

Ethereum and most other coins are said to be censorship resistant. Will other validators see Lido, and Coinbase as a threat?

Will the rest of the Ethereum network strip away staked coins from those involved in transaction censorship? And how is this possible when Ethereum is an open network and OFAC-linked stakeholders hold a majority stake?

For many individuals, the problems with Tornado Cash and Ethereum’s validation in compliance with regulation have shown that privacy is in great threat. It has challenged the future of DeFi.

A series of major DeFi protocols has followed the U.S. order including Uniswap, Aave, and Balancer, among others.

While many say in favor of the protocol, yet some believe the U.S. authorities made the right choice with the ban.

It has brought up a lot of important questions and divided opinions regarding the decentralized nature of DeFi initiatives and how they relate to a country’s duty to comply with the law.