Ethermine, the largest Ethereum mining pool, is no longer producing blocks that contain Tornado Cash transactions. It shows the U.S. sanctions against Tornado Cash are working their way through very quickly. Meanwhile, Ethereum experts are speculating about what a realistic defense is. Will there be a user activated soft fork?

Recently, the United States, in the capacity of the agency OFAC, sanctioned the use of Tornado Cash. As a result, every American and every American company is prohibited from using this coin mixer. It soon became clear that not only the companies from whom we expect it, such as Circle (USDC), went along with the sanctions. That was already pretty harsh: it meant that if your USDC had gone through Tornado Cash, you had effectively lost it.

But then, decentralized (?) lending and trading platforms like Aave and Uniswap went along with the sanctions: they blocked addresses that had interacted with Tornado Cash. It raised the question of how censorship-resistant crypto is. Now that the largest Ethereum mining pool, Ethermine, has also stopped recording Tornado Cash transactions, the issue has become even more pressing.

The Ethermine pool accounts for a third of the Ethereum hashrate. It is not an American company, but some affiliated miners are. Perhaps that is why the company is cautious. Because mining pools other than Ethermine do still take Tornado Cash transactions, Tornado Cash is not yet cut off from the crypto world: transactions do get through in about two-thirds of the blocks - and so are at best queued for a little longer.

A slippery slope

Ethermine's concession shows just how deep sanctions can run - namely, at the fundamental level of the protocol itself. It is a dangerous precedent. Why is this problematic? A blockchain is a communication technology that, like the telephone or the Internet, can be used by anyone. Ethereum should not determine which transactions get through and which do not. Crypto is "permissionless": no one asks you for a passport when you want to send or receive crypto. The technology is neutral.

War after the Ethereum Merge?

The controversy comes at an interesting time, with the Ethereum Merge coming up in mid-September. Miners will play no role in the new, proof-of-stake Ethereum. But what will their successors, the staking pools, do? And how will Ethereum's users respond? They might activate what is called a user activated soft fork.

Bitcoin's hard fork in 2017 showed that ordinary users have a lot of power if the 'industrial' players in the network do something they don't like. At the time, node runners of Bitcoin (ordinary users) did not accept that the miners wanted to implement a larger block size. A fork to Bitcoin Cash was the result: ultimately a losing chain. The "people's chain" (the unmodified Bitcoin) won.

The question is whether something similar could happen to Ethereum. It is not impossible that users who are against censorship support a soft fork - split-off - of Ethereum in which censored blocks have no place. What does make this scenario problematic again is that unlike with Bitcoin in 2017 all kinds of coins "live" on Ethereum. As already mentioned, Circle, the company behind stablecoin USDC, determines on which Ethereum chain their cryptodollars have value and on which they are worthless. Circle will most likely support a fork that meets the requirements of the US sanctions list. Also, it is not so easy to run an Ethereum node.

To be continued...