The Tornado Cash sanctions are a warning shot to the entire DeFi community.
If you’ve been following the news, you’ll know that Tornado Cash, a privacy tool that enables you to shield your transaction history, is the first-ever smart contract to be sanctioned by the U.S. Treasury.
This means you can now go to jail for 30 years if you interact with the smart contract in the U.S. (in fact one of the suspected developers was arrested in the Netherlands this morning).
These sanctions are a huge jump from anything that’s ever happened before.
In the past, the U.S. sanctions list has only targeted people and entities. Now, it’s targeting a tool. A neutral piece of technology.
Yes, this technology can be used for bad stuff like money laundering, but it can also protect your privacy and allow you to do good.
We’ve seen this in Ukraine, where Russian people have used Tornado Cash to send money without facing persecution in their homeland. Now this kind of charity will be much more difficult.
But perhaps the bigger news for us, in DeFi, is the knee-jerk reaction we’ve seen from centralised entities and the backlash this has caused.
Many CeFi projects have taken these sanctions strongly, and used them as a pretext to block members of DeFi.
Infura and Alchemy, a pair of blockchain development projects, both stopped the Tornado Cash website from using their URLs and prevented users of their services from connecting to Tornado Cash.
dydx, a trading platform, blocked access to anyone who’d received funds from Tornado Cash — and that was retroactive, so it went way beyond the sanction requirements.
The creators of the USDC stablecoin even froze assets that were held in Tornado Cash, meaning that anyone who’d deposited to Tornado Cash now couldn’t get their funds out.
This is something that people in DeFi have been worrying about for a long time.
It’s the reason people don’t like centralised stablecoins; the people behind them can simply freeze your funds in response to government pressure. Likewise, centralised services that connect to blockchains, like Infura and alchemy, can shut down your access.
No matter how decentralised the smart contracts are, or the blockchain is, government sanctions – which essentially amount to threats against their own people – can still lead to vast chunks of DeFi being closed off and rendered inaccessible.
Now, the adding of Tornado Cash to the sanctions list probably doesn’t affect rhino.fi very much. But if another smart contract, like Uniswap, or an entire rollup, were ever to be sanctioned in a similar way, it could be hugely damaging.
So if we want to build systems that are truly resilient and open, and really help people protect themselves – be it through privacy or through access to financial services that might otherwise be off-limits – we must remember that these systems are only as strong as their least decentralised component.
Yes, the Tornado Cash smart contracts were decentralised, but the website was hosted somewhere that wasn’t decentralised. They used connections like Infura, which wasn’t decentralised, and they had stablecoins like USDC which weren’t decentralised.
We need to solve all of those pain points and make them all equally decentralised if we want these systems that we’re building to be resilient.
This is something that we’re definitely going to take on board at rhino.fi. We want to make sure that even if we were to go offline, our users can still access the services we offer.
The same lesson holds true across the DeFi community. We need to start designing for the worst-case scenario.
If any government anywhere in the world, whether it’s one we tend to quite like, like the U.S., or a more authoritarian government that we’re not so closely aligned with, decides to try and block access to DeFi, are we able to resist that?
The only sure-fire way to future-proof this problem is to decentralise everything: decentralised nodes, decentralised stablecoins, decentralised smart contracts.
Because, if the Tornado Cash farrago has taught us one thing, is that we can’t trust CeFi with our future.
It’s time to throw off the shackles of centralisation, once and for all.