Tornado Cash is a decentralized cryptocurrency mixer or tumbler based on the Ethereum blockchain. It allows users to pool and redistribute cryptocurrencies and transfer them anonymously, obscuring the on-chain link between sender and receiver.
The “need” for such a tool arises because most popular blockchains, such as Bitcoin and Ethereum, have publicly available transactions. The transactions are pseudonymous, but anyone can observe the public addresses to track the user’s spending patterns. If someone gets the details of a transaction associated with a user, they can potentially discover the entire transaction history associated with that address, and possibly even the user themselves. So this is a tool for those who prioritize absolute anonymity and privacy.
Tornado Cash is used for a variety of legitimate purposes, including privacy, anonymous donations, and protecting users’ identities in sensitive political environments. However, it has attracted the attention of authorities around the world for its involvement in several illicit activities, including money laundering and facilitating the movement of stolen funds.
How does Tornado Cache work?
Tornado Cash allows users to anonymize their Ethereum transactions through a system of pools, also known as “anonymity sets.” These pools are essentially Ethereum accounts managed by smart contracts, allowing users to withdraw only the amount they originally deposited.
Each pool is designed to accept a specific token in a fixed amount. For example, one pool may only accept deposits of 1 ETH, while another pool may process deposits of 10 ETH. The Tornado Cash Router contract then aggregates all deposits into these shared pools. As the pool size grows, it becomes increasingly difficult to track or link deposits and withdrawals.
Tornado Cash uses a cryptographic method called zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge), which allows users to prove that a transaction is valid without revealing any details about the transaction itself. When a user deposits funds into Tornado Cash, a unique cryptographic hash is generated and stored in a smart contract. This hash, or “commitment,” serves as proof of claim to the funds.
To withdraw funds, users provide a commitment and a recipient address. This mechanism effectively anonymizes transactions by ensuring that withdrawals cannot be linked to the original deposit. Commitments can be used to redeem ETH from any wallet, so users can withdraw funds to a separate wallet or even sell their commitments to someone else if they wish.
What is a TORN token?
The TORN token is the governance token of Tornado Cash. It was announced in December 2020 and launched in February 2021. It allows holders to vote on on-chain proposals such as adding new Tornado pools with different parameters, suspending or unsuspending token transfers, implementing or modifying anonymous mining rewards, and managing the treasury.
Tornado Cash has implemented an anonymity mining system to incentivize long-term deposits in the Tornado pool. Participants are rewarded with anonymity points (AP) based on the length of time their assets are held in the pool. These APs can be converted into TORN tokens via Tornado’s custom-built automated market maker (AMM). The AMM is designed to prevent participants from spending their deposits when the protocol’s total locked value (TVL) is low.
In May 2023, the attacker The malicious proposal passedIt gives control over the governance system of Tornado Cash. The attacker used this control to steal hundreds of thousands of TORN tokens and exchange most of them for 485 ETH. The governance token holders then I voted We have passed a proposal to regain control over the operation of the protocol and return control to the original governance holders.
History, Development, and Legal Issues of Tornado Cache
Tornado Cash was developed as an open-source project by a team of developers including Alexey Pertsev, Roman Storm, and Roman Semenov. It was released in 2019 and is built on the research of the Zcash team, known for its work in the privacy-focused cryptocurrency space.
In May 2020, the Tornado Cash team relinquished control of the protocol, effectively decentralizing it through a contract update called the Trusted Setup Ceremony. This move transferred governance to the Tornado Cash community via the TORN token, an ERC-20 token used to vote on protocol changes that were released in 2021.
By this time, the platform had gained significant popularity, and by 2020, after announcing liquidity incentives, the total value locked in privacy pools had increased tenfold, reaching nearly $300 million.
However, this increased adoption has come with considerable controversy. The protocol has been used by malicious actors in several high-profile cryptocurrency exploits, including the Ronin Network and Poly Network hacks, where stolen funds were laundered through Tornado Cash. These incidents have drawn increasing scrutiny from regulators.
This oversight will be implemented by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) in August 2022. Approved Tornado CacheIt was accused of being used to launder more than $7 billion in cryptocurrency, including funds linked to a North Korean hacking team. Lazarus Group. These sanctions effectively prohibited U.S. agencies from interacting with the protocol. This measure Widespread criticism From prominent cryptocurrency advocates.
After US regulators imposed sanctions on Tornado Cash, one agency compensation The movement of small amounts of ETH from sanctioned wallets to numerous wallets belonging to celebrities was seen as a form of protest. As a result, many of these wallets, through no fault of their own, interacted with US sanctions agencies, an action known as “dusting.”
On August 10, 2022, Alexey Pertsev Get arrested In the Netherlands he was charged with facilitating money laundering.
The U.S. Department of Justice (DOJ) later charged Roman Storm and Roman Semenov with conspiracy to commit money laundering. Get arrested Storm, August 2023. Storm’s legal proceedings are still ongoing. advanceSemenov was added to OFAC’s list of Specially Designated Nationals and remains free, as is Ethereum co-founder Vitalik Buterin Donated We have funded a legal defense fund for Tornado Cache developers.
Perchev later be sentenced He was sentenced to 64 months in prison in the Netherlands in May 2024 for money laundering. His bail application was also denied as his defense team prepared an appeal.
Despite these challenges, Tornado Cache continues to operate.
Key Cases Related to Tornado Cache
Tornado Cash has been involved in several high-profile cryptocurrency theft and money laundering incidents, some of the most notable being:
- Ron’s Network Attack: In March 2022, Ronin Network, a sidechain used by the popular game Axie Infinity, was hacked, resulting in the theft of $624 million worth of cryptocurrency. The stolen funds were later I did the laundry Through the tornado cache.
- Poly Network Exploit: In August 2021, hackers exploited a vulnerability in Poly Network, a cross-chain DeFi platform, and stole $611 million. A significant portion of these funds were I did the laundry Through the tornado cache.
- Wormhole Exploit: Another cross-chain protocol, Wormhole Network, was hacked in February 2022, with $326 million stolen. The hackers used Tornado Cash to hide the source of their illicit profits.
- Euler Financial Exploitation: Euler Finance, a DeFi lending platform, in March 2023 be exploitedA loss of $197 million occurred. Hackers transferred the stolen funds through Tornado Cash.
- High official X: Indian exchange Wazir X to launch in July 2024 Hacked Over $230 million was stolen by North Korea’s Lazarus Group, with hackers later moving the funds through Tornado Cash.
Disclaimer: This article was created with the help of OpenAI’s ChatGPT 3.5/4 and has been reviewed and edited by our editorial team.
© 2024 The Block. All rights reserved. This article is provided for informational purposes only. It is not provided or intended to be legal, tax, investment, financial or other advice.