Faulty Censor

Market Meditations | August 16, 2022

In the wake of the OFAC sanction on Tornado Cash, there is growing chatter in the Ethereum community about how decentralised it really is and if it would be able to resist government-enforced censorship:

  • According to Glassnode, more than 85% of its supply is held by wallets with at least 100 ETH and nearly 30% have more than 100,000 ETH.
  • Some of the largest holders are currently in place on the Beacon Chain to offer staking services via their validator nodes when the protocol moves to Proof of Stake next month.
  • More than two thirds of the staked supply is believed to be controlled by just a few companies, such as Coinbase, Kraken, Bitcoin Suisse, and Lido.
  • Given the compliance of DeFi protocols with the Tornado Cash sanction recently, community members are worried that these staking companies will similarly look to exclude certain transactions from blocks.
  • In theory, if a validator refuses to sign a block they can suffer from slashing, where they have their balance reduced and are “queued for exit” from the chain.
  • However, if the majority of validators decides to exclude transactions due to regulatory pressure then it is tantamount to protocol censorship.
  • Twitter user @ercwl asked whether the Ethereum community would then vote to burn the companies stake via social consensus – to which Vitalik responded that he voted X: