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Dear nation without a bank,

Here is a recap of the biggest crypto news from the second week of August.

Tornado Cash is a cryptocurrency mixer that allows users to transact privately with zk-SNARK technology. Here’s how it works:

  1. I want to send you ETH privately

  2. I connect my wallet to Tornado Cash, and the platform only allows me to deposit fixed, predefined amounts of crypto (e.g. 1, 10, or 100 ETH) to standardize all transaction amounts for anonymity

  3. I decide to deposit 10 ETH which goes to Tornado shared pool

  4. When depositing, Tornado gives me a key with a secret cash (called a “private note”) for later withdrawal

  5. I send you my private note

  6. You wait a day, then withdraw the 10 ETH with the private note to your wallet address

  7. A “relay” charges you a small fee to send the 10 ETH to your wallet, then initiates the withdrawal pays gas fees on your behalf

  8. You receive 10 ETH from me, and there is no on-chain link between our two wallets. Our transaction is completely private.

Tornado Cash is really useful if you value your privacy…or if you’re trying to conduct illegal (but not necessarily immoral) transactions.

For this latter reason, the US Treasury is imposing sanctions on Tornado Cash this week.

In fact, that’s not technically true. “Tornado Cash” is just a set of open-source smart contracts running on a public blockchain. So the logic of sanctioning a smart contract is akin to sanctioning, say, a pool of water.

Our language obscures where the prohibitive burden of punishment rests – it is people who are prohibited from interacting with Tornado Cash, namely privacy-seeking Americans. Whether you mess up this smart contract, if you Dip your toes in this water, you violate our political sanctions and go to jail, says the US Treasury.

In response, a host of platforms are quickly becoming politically isolated:

  • Circle, the USDC issuer, has moved to blacklist wallet addresses that have interacted with the Tornado Cash contract. This prompts discussions in the Maker community to reduce DAI’s reliance on USDC and completely separate the stablecoin from the dollar

  • Github removed Tornado Cash source code and banned source contributors (hence the need for decentralized alternatives like Radicle).

  • Infura and Alchemy, centralized service providers that provide access to on-chain data, blocked RPC requests to the Tornado interface. Even its decentralized alternative Pocket Network also blocked the sanctioned list of wallet addresses from accessing its front-end portal.

  • dYdX also block users whose wallet funds have directly interacted with Tornado

The list (will) continues.

US Treasury points to illegal money laundering for imposing sanctions on Tornado Cash, citing the North Korean-linked Lazarus Group hackers who laundered an estimated $561 million through Tornado.

These numbers look so bad for Tornado when considered in absolute terms. But can we have some context please? When we zoom in on Tornado’s activity since its launch in 2019, only a minority of 10.5% of all its transactional volumes were linked to stolen funds.

If you think 10.5% (~$700M+) is a lot, it’s not. Chainalysis research shows that a tiny 0.15% of total cryptocurrency volumes in all of 2021 (a booming market nonetheless) were labeled as “illicit” transactions. This is how little cryptography is used in criminal activities.

And that’s a drop in the ocean compared to the amount of fiat laundered each year, which according to the UNis between $800 billion and $2,000,000.

If governments are worried about illegal money laundering, there are far bigger issues to worry about than a blender like Tornado. Sound public policy aims for the median, not the margin, and illegal money laundering in Tornado is the result of bad apples at the margin, rather than the norm. So the impetus to sanction a crypto mixer for encouraging crime is a pretty flimsy justification.

As I write this, a 29-year-old developer of the Tornado Cash Protocol has apparently also been stopped in Amsterdam. Shit.

One way to respond to this shitshow is of course to make fun of it. If a wallet receiving money through Tornado Cash is likely to violate sanctions, what happens when you use the platform to bulk send crypto to thousands of recipients?

This is all fun and amusing, and a good exercise in pointing out the sheer illogicality of it all, but realistically the US Treasury isn’t going to deploy the troops against Jimmy Fallon or anyone using Tornado for ETH. Remember that while Tornado Cash’s front-end site may be taken down, those with the technical know-how can still access its protocol under the hood, and its code can (and likely will) be forked.

Ethereum’s final test – the Goerli testnet – is a simulation of the actual merger next month. Goerli was successfully retired last Wednesday. 🥳

Ethereum developers are looking for various things to know if the merger was successful. For one thing, they look at the participation rates of validators of at least a 66% ongoing participation level to see if block validation is going as usual.

The second way is to look at transaction activity and see if users are filling blocks. Blockchains sell blocks, remember?

If you missed it, we broadcast everything live.

With the success of the third and final Goerli testnet, which officially schedules the merger of the Ethereum mainnet and the proof of the Beacon chain for approximately five weeks on September 15-16.

A bomb Coindesk Article reports that two brothers, posing as several different pseudonymous identities, defrauded an incredible $7.5 billion of Solana’s $10.5 billion TVL atop the channel, most of that value being counted multiple times between their Saber Finance and Sunny Aggregator protocols.

Oh, and they’re now moving to the Aptos channel.

There are many issues with the metric locked to the commonly used total value. In a financial system where assets can be arbitrarily inflated and remortgaged across multiple channels, the use of TVL is limited. See this classic blog post by Coinmetry for thorough ventilation.

Arbitrum has been on a roll lately. They are launching a major network upgrade (Arbitrum Nitro) at the end of August, relaunch Arbitrum Odysseya user adoption campaign that was “too successful”, and today announced the launch of Arbitrum Nova, a brand new AnyTrust public channel for games and social dapps.

Additionally, Reddit is also launching its community point system on Nova.

Meta launches NFTs on the Flow blockchain; digital travel is ordered by the courts to return $270 million to its clients; Optimism governance proposal by Polynya to suspend all funding until sufficient decentralization is achieved; Coinbase partners with TradFi’s largest asset manager BlackRock to provide an institutional investment platform.

Here’s what we have planned for next week.

  1. Polynya joins us on the podcast to share her crypto thesis

  2. William drops tactic on GMX perpetuals for Arbitrum

  3. Jordi Alexander tells us what to watch out for after the merger

Donovan Choy

🙏 Sponsor: Circle—Redeem Code Without bank for $100 off Converge22 tickets 👀

Listen to the podcast episode | Apple | Spotify | Youtube | RSS feed

  1. 📘 The biggest threat to fusion

  2. 📘 How to Win in a Bear Market (NFT Edition)

  3. 📘 The Ethereum Watershed 🔥

  4. 📘 How to Win the Merge

  5. 💬 Tell us about you!

  1. 📺 network state rise | Balaji Srinivasan

  2. 📺 Cryptographer David Chaum | Layer zero

  3. 📺 Tornado Cash BANNED By OFAC…Is This War On Crypto?

  4. 📺 Goerli Fusion LIVE | Bankless, ETH stakers and friends!

  5. 📺 Bankless Rollup 8/12

  1. 📘 Async Art is open to everyone 🎨

  2. 📘 NFTs go green 🌳

  3. 📘 NFT and privacy 🕵

  1. 📘 Uniqly: the intersection of physical goods and digital assets

  2. 📘 Solving the Compensation Puzzle | DAO status

  3. 📘 A story of two markets | BanklessDAO Weekly Summary

  1. 📺 Ashley Benson Talks Fame, Hollywood, and Her New Movie NFT

  2. 📺 Unlikely: Powering the Otherside Metaverse with Herman Narula

  3. 📺 CC0: Hero or Zero? | DCinvestor, J1mmy.eth, Zeneca_33, Edwards & Rogers

  1. 📺 Scalable DAOs with Chase Chapman

  2. 📺 BrightID with Adam Stallard

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