Tornado Cash

Tornado Cash, also stylized as TornadoCash, is a decentralized cryptocurrency tumbler that runs on Ethereum Virtual Machine-compatible networks. It was initially released on December 17, 2019, and its stable release, version 3, was launched on December 16, 2021.

On August 8, 2022, the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury blacklisted Tornado Cash, making it illegal for U.S. citizens, residents, and companies to use the service. This was due to allegations of laundering over $7 billion in virtual currencies, including $455 million believed to have been stolen by the Lazarus Group, a hacking group associated with the North Korean government.

Following the blacklisting, the domain used by the project was taken down, and GitHub removed the Tornado Cash repository and suspended the developers' accounts. Alexey Pertsev, one of the developers, was arrested in Amsterdam on suspicion of involvement in concealing criminal financial flows and facilitating money laundering through the service. On May 14, 2023, Pertsev was sentenced to 5 years and 4 months in prison for his role in Tornado Cash development.

Additionally, on August 23, 2023, two more Tornado developers, Roman Storm and Roman Semenov, were charged with assisting in money laundering in the amount of $1 billion. Roman Storm was arrested in Washington State.

Tornado Cash uses a governance model where community members can vote on proposals with the TORN token. TORN is an ERC-20 token with a fixed supply of 10 million tokens. The token distribution includes 55% reserved for the DAO governance treasury, 30% for founding developers and early supporters, and 10% for anonymity mining on Tornado Cash’s ETH pools.

On May 21, 2023, a hacker used a malicious proposal to gain full control of Tornado Cash's DAO. The hacker put forth a proposal for the DAO to vote on with hidden code that would issue fraudulent voting tokens to them. The vote was passed, giving the hacker enough voting tokens to control any future proposals. The hacker eventually relinquished control, but not before converting a portion of the stolen governance tokens to Ether valued at around $900,000 and laundering them through the service.

As of September 2023, Tornado Cash continues to operate despite the legal issues and sanctions. It remains the largest crypto mixer running on the Ethereum blockchain, with around $230 million of crypto in its contracts, primarily in ETH.

Tornado Cash (TORN) is a decentralized, non-custodial cryptocurrency mixer that operates on the Ethereum blockchain. It allows users to anonymize their Ethereum transactions by breaking the on-chain link between source and destination addresses. Here is a detailed explanation of how it works:

1. Deposit: Users deposit their assets (ETH or other supported tokens) into one of Tornado Cash’s smart contracts, known as pools. These pools are immutable and cannot be modified or shut down by anyone, including the original developers.

2. Mixing: The deposited assets are mixed with other assets in the pool, making it difficult to trace the origin of the funds. This mixing process ensures that the link between the deposit and withdrawal addresses is severed.

3. Withdrawal: Users can then withdraw their assets from a different address, maintaining their privacy. The withdrawal process involves splitting the deposit note into a "secret" and a "lock," which are used to verify the user’s ownership without revealing their identity.

1. TORN Token: The TORN token is an ERC-20 token used for governance purposes. It allows holders to vote on proposals that shape the direction of the Tornado Cash protocol.

2. Governance: The governance model is decentralized, meaning that community members can propose and vote on changes to the protocol. This ensures that the project remains autonomous and decentralized.

1. Zero-Knowledge Proofs: Tornado Cash uses zk-SNARK technology, which enables zero-knowledge proofs. This allows users to demonstrate possession of information without revealing it, further enhancing privacy.

2. Open-Source: The code behind Tornado Cash is fully open-sourced, ensuring transparency and community involvement in its development.

1. Anonymity Mining: Users can earn TORN tokens by participating in the anonymity mining system, which rewards users for supporting the project’s privacy features.

2. Relayer Services: Users can opt to use relayer services for gas payments, which can further enhance privacy by hiding the user’s wallet address.

1. Sanctions: In August 2022, the U.S. Department of the Treasury sanctioned Tornado Cash, making it illegal for U.S. citizens, residents, and companies to use. This led to the shutdown of the project’s web domain and GitHub accounts, and the arrest of one of the developers.

2. Malicious Use: Tornado Cash has been used by hackers and malicious actors to launder stolen funds, which has raised concerns about its potential misuse.

Despite these challenges, Tornado Cash remains a significant player in the cryptocurrency space, offering a unique solution for users seeking privacy and anonymity in their transactions.

The token Tornado Cash (TORN) has several strengths:

1. Governance and Voting:
   TORN is a governance token that allows holders to propose and vote on protocol upgrades and fixes. This decentralized governance model ensures that the community has a say in the project's direction, fostering a sense of ownership and participation.

2. Fixed Supply:
   The total supply of TORN tokens is capped at 10 million, which helps maintain a stable token economy and prevents inflation. This fixed supply also adds predictability to the token's value.

3. Anonymity Mining:

Tornado Cash features an innovative anonymity mining system that rewards users who support the project's privacy features by providing liquidity. This system incentivizes users to contribute to the platform's privacy features, enhancing its overall effectiveness.

4. Decentralized and Non-Custodial:
   Tornado Cash is built on the Ethereum blockchain and operates as a decentralized, non-custodial privacy solution. This ensures that users have full control over their assets and transactions, maintaining their privacy and security.

5. Strong Token Distribution:
   The token distribution is well-structured, with 55% reserved for the DAO governance treasury, 30% for founding developers and early supporters, and 10% for anonymity mining. This distribution ensures that the token is well-distributed among stakeholders and contributors.

6. Integration with Ethereum:

As an ERC-20 token, TORN is easily accessible and compatible with the Ethereum ecosystem, making it simple for users to interact with the platform and utilize its privacy features.

These strengths contribute to Tornado Cash's robustness and potential for long-term success in the cryptocurrency market.

Tornado Cash (TORN) faces several financial risks due to its designation as a sanctioned entity by the U.S. Office of Foreign Assets Control (OFAC). These risks include:

1. Money Laundering and Illicit Activities: Tornado Cash has been used to launder billions of dollars in criminal proceeds, including funds stolen by the North Korean-linked hacking group, Lazarus Group. This association with illicit activities poses significant financial risks to investors and users.

2. Sanctions Compliance: As a sanctioned entity, U.S. persons, including financial institutions and exchanges, are prohibited from dealing with Tornado Cash. This restriction can severely limit the liquidity and usability of TORN, making it difficult for investors to buy, sell, or trade the token.

3. Legal and Regulatory Uncertainty: The decentralized nature of Tornado Cash, operating on open-source software, raises questions about how to effectively enforce sanctions and ensure compliance. This legal uncertainty can lead to further risks and challenges for investors and users.

4. Volatility and Market Fluctuations: The sanctions imposed on Tornado Cash have led to significant price drops, with the token's value plummeting by as much as 49.5% in a single week. This volatility can result in substantial losses for investors.

5. Security Risks: Tornado Cash's experimental nature and decentralized structure make it vulnerable to security risks, which can compromise user funds and further erode investor confidence.

6. Alternative Mixing Services: The sanctions on Tornado Cash may lead to the emergence of alternative mixing services, potentially fragmenting the market and reducing TORN's value.

These financial risks highlight the challenges and uncertainties surrounding Tornado Cash, making it crucial for investors to carefully evaluate their risk tolerance and investment decisions.

• Roman Storm: Co-founder of Tornado Cash, interested in blockchain technology since 2011, and involved in decentralized finance (DeFi) projects like Compound and 0x.
• Roman Semenov: Co-founder of Tornado Cash, expert in quantum statistics and field theory, and previously co-founded RedHelper and PepperSec.