As international regulations change, individuals are increasingly interested in protecting their privacy. One of the co-founders of Ethereum, Vitalik Buterinand others published Research Papers. The authors explore the intersection of blockchain technology and financial regulation through the lens of privacy pool systems.
This paper presents a novel perspective that leverages zero-knowledge proofs to address privacy challenges while maintaining regulatory standards.
Buterin and his co-authors Jacob Illum, Matthias Nadler, Fabian Schar and Ameen Soleimani sought to find a “middle ground” that would reconcile privacy needs with regulatory compliance requirements.
Study raises concerns about tornado cash
The document begins with an analysis of the Tornado Cash protocol, a well-known tool for enhancing the privacy of cryptocurrency transactions. The protocol enables users to conduct crypto transactions without revealing their identities.
However, recent legal action, including criminal charges and sanctions against Tornado Cash founders by the U.S. Office of Foreign Assets Control (OFAC), has exposed a major flaw.
The main drawback, the study noted, is that it is difficult for law-abiding users to escape the illegal activity that the protocol inadvertently attracts. “Real users cannot distance themselves from the criminals the protocol attracts. “
Ethereum Founder Proposes Applicable Privacy Protocol Solution
Buterin’s proposal provides a solution by introducing the concept of “association sets” in the privacy pool protocol.
This enables users to publicly verify the source of their funds while protecting their privacy. By proving their affiliation with a specific association set, users can prove that their funds came from legitimate sources without disclosing their full transaction history.
The basic concept is to allow users to share zero-knowledge proofs of the legitimacy (or lack thereof) of their source of funds. This is achieved by attesting to their membership in a collection of custom associations that adhere to specific standards dictated by regulatory requirements or social consensus.
In an imaginary situation, Buterin offers an example: “Suppose we have five users—Alice, Bob, Carl, David, and Eve. The first four are law-abiding people who prioritize their privacy, while Eve’s The context raises some doubts.” Buterin Further additions:
When these users wish to withdraw funds, they designate the group they are associated with, encouraging them to involve more users to enhance their privacy. However, they ignored Eve on purpose to avoid arousing suspicion from merchants or exchanges.
In the given example, users have an incentive to expand their associated set to preserve their privacy, since they can choose which group to participate in when they want to withdraw funds.
However, users deliberately exclude Eve from their associated sets to avoid merchants or exchanges viewing their funds as suspicious.
In Eve’s example, she needs to create an association set that includes all five deposits because she cannot exclude hers. Users who want to continue using Tornado Cash but stay away from illegal activities need to implement a similar use case.
Ameen Soleimani, a Tornado Cash contributor and one of the study’s authors, was among others presenting the solution at the “Finance Meets DLT” conference at the University of Basel in Switzerland. While some praised the paper, others criticized it for its connection to Chainalysis.
The company has been the target of controversy among cryptocurrency users due to its ties to the U.S. government.Social media platform X users ask: Who defines illegal transactions, the SEC?
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