Not a single transaction was censored on Ethereum

Ethereum sorts transactions according to the U.S. Treasury's guidelines — how valid is the criticism of Tornado Cash handling?

Ethereum sorts transactions according to the U.S. Treasury's guidelines — how valid is the criticism of Tornado Cash handling?

The accusation weighs heavy: is Ethereum practicing censorship? More than half of all transactions from the controversial mixer Tornado Cash are avoided by validators. Ethereum is sacrificing the core properties of a blockchain — decentralization, resistance to censorship, neutrality — according to critics. But it’s more complicated than that.

Trigger: Tornado Cash Ban

Some transactions are more anonymous on a blockchain than others — if they go through a mixer that shrouds the transaction paths. Ideal for questionable financial activity: according to Chainalysis, nearly a quarter of all transactions obfuscated via mixers come from addresses with a criminal history in the first half of this year.

Against this backdrop, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) added the Tornado Cash crypto mixer to the blacklist in early August. Since then, use of the protocol is illegal and can be prosecuted. OFAC says more than seven billion U.S. dollars have been laundered through Tornado Cash since 2019. Much of it by the North Korean Lazarus hacking group.

Is Ethereum Censoring Tornado Cash?

The crypto space erupted in response. Coinbase and Coin Center are suing the controversial decision by the U.S. Treasury. Censoring open-source software would amount to a violation of free speech under U.S. law, according to opponents of the ban.

Ethereum's handling of OFAC guidelines has now sparked a fundamental debate. 52 percent of the transactions sent through the mixer are currently not reaching the network. Criticism of this practice is clear: Ethereum jeopardizes its decentralization, makes itself unreliable, and a proxy for official censorship. But the devil is in the details.

"Not a single transaction was censored on Ethereum".

CyberCapital founder Justin Bons now presents his view: "Not a single transaction was censored on Ethereum because of OFAC!" Even with "50 percent OFAC compliance," a "non-compliant ETH transaction is confirmed within 30 seconds," Bons says, clarifying: "Censorship only happens if OFAC-compliant block producers refuse to build on non-compliant blocks."

The real issue, according to Bons, concerns Miner Extracted Value — MEV. Block producers can decide which transactions they process, whether it’s proof of work or proof of stake. Transactions that earn higher profits are favored.

In the MEV filter

Miner Extracted Value is the maximum tradable value that can be pulled from block production. This implies that transactions are pre-selected. According to Bons, this system has led to different forms of centralization.

Most validators use Flashbots’ MEV-Boost software, which filters out the most profitable blocks but does not forward transactions from sanctioned addresses. So Tornado Cash transactions aren’t forwarded either. About 80 percent of MEV-Boost blocks were forwarded by Flashbots — a roughly equal share of Tornado Cash transactions disappeared.

The accusation that Ethereum is intentionally censoring transactions seems blown out of proportion. The impact of the Flashbots MEV-Boost is problematic, but it doesn’t directly block the network’s decentralization. Bons also points to updates that could further decentralize the reward mechanism. The debate this has sparked will likely accelerate this evolution.