The co-creator of Ethereum (ETH) describes a mechanism by which dishonest crypto users can be removed from crypto mix protocols.
In a new article, Ethereum co-founder Vitalik Buterin and four other authors explain how privacy pools can be helpful in rooting out unscrupulous crypto traders.
A privacy pool is a smart contract-based privacy project that allows users to generate new ETH addresses that are not tied to their previous transactions.
As stated in the summary of the article,
“The core idea of the proposal is to allow users to publish a ‘zero-knowledge proof’, demonstrating that their money is (not) coming from (illegitimate) sources, without publicly revealing their entire transaction graph. This is achieved by proving membership of custom association sets that meet certain properties required by regulation or social consensus.”
In a long thread, one of the article’s co-authors, Ameen Soleimani of Privacy Pools, continues explains how the protocol works and how it could help the problems users face from the sanctioned cryptomixer Tornado Cash, which was deemed a threat to national security in 2022 and was banned in the US.
“Privacy Pools is an open source project that attempts to fix the main flaw in Tornado Cash: Tornado Cash users were unable to demonstrably distance themselves from illicit funds – except by revealing their full transaction history – which only a few did…
Privacy Pools allow users to post zero-knowledge evidence that their withdrawal comes from an “association set” that excludes known illegal deposits. In theory, this allows users to prove regulatory compliance while still maintaining privacy while using public blockchains.”
Soleimani says he plans to meet with US regulators, such as the Office of Foreign Assets Control (OFAC) and the Financial Crimes Enforcement Network (FinCEN), to see how the pools could be used to help bolster national security and combat money laundering.
The article concludes that privacy and regulation can be compatible, even though they are generally perceived as contradictory.
“For example, suppose users can prove that their money is unrelated to deposits from known illegal sources, or prove that the money is part of a specific set of deposits, without disclosing any further information.
Such a set-up can generate a segregation equilibrium, with honest users strongly incentivized to prove they are members of a certain conforming association set, while still enjoying privacy within that set. Conversely, it is impossible for dishonest users to provide such proof.”
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Generated image: Midjourney