Can Ethereum defend itself against the massive US censorship attempt?

So we will continue to focus on technology, politics, privacy and other related topics until the market stops being boring.

But don’t worry, there’s still plenty to chew on. For example, we can ruminate on Ethereum’s long-awaited transition from proof-of-work to proof-of-stake (which we covered last week), which may well be happening soon. Or, the US Treasury Department’s Office of Foreign Assets Control (OFAC) added Tornado Cash to its list of Specially Designated Nationals because North Korean hackers allegedly used it to launder money.

Since these chewables mean nothing to almost everyone, here’s the easier-to-chew translation: Ethereum (a high-value crypto platform) is getting a big tech update and the US government (through the OFAC) made it illegal to use Tornado Cash (an Ethereum “mixer” that obscures the path of Ethereum-based transactions) because suspected criminals have used it to launder money (which allegedly only happens by Tornado Cash and not actually by financial institutions like HSBC).

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Instead of diving into the details of these two topics, I think it’s best to focus on a topic of conversation that took place on Twitter about a potential “user-activated soft fork” (UASF) on Ethereum, as it neatly bridges these two topics. If that doesn’t mean anything to you right now, hang in there…

There is a fantastic book by Jonathan Bier called “The Blocksize War”, which describes an important period in the history of Bitcoin (it is available for free in serial form on the BitMEX site). Between August 2015 and November 2017, Bitcoin network participants were at war with themselves over Bitcoin’s blockchain block size limit. Although it seems innocuous on the surface, it was a highly contentious technical debate that ultimately led to the creation of an alternative version of Bitcoin called Bitcoin Cash.

Although the book is not required reading for those with a superficial interest in bitcoin, I think it is worth reading. Let’s skip over many details about BitcoinXT, Bitcoin Unlimited, Bitcoin Classic, ASICBoost, SegWit2x and more, to get to the most important battle in block wars: the activation of Segregated Witness (SegWit) by the through a UASF.

What SegWit did was technologically significant, but what’s more important to the topic at hand is how it was enabled. The short and diluted summary is as follows:

Miners and users use the same software (usually on different hardware), with one notable difference: Miners can mine blocks, users cannot. Bitcoin miners didn’t want SegWit, while users wanted it, for various reasons that we won’t discuss here. Since things are enabled on Bitcoin by signaling approval (much like a vote) through mined blocks, SegWit was not going to happen. But users really wanted SegWit, so they took their “full nodes” (meaning their Bitcoin software and hardware), which each independently checks that the rules of the Bitcoin blockchain are applied, and started to apply SegWit.

The users succeeded and their actions resulted in a soft fork of the Bitcoin protocol, hence UASF. (The user-enabled part is obvious, but the soft fork part just means that the code change was backwards compatible).

But this column is not about Bitcoin’s UASF, but about how a proposed Ethereum UASF could potentially circumvent OFAC’s transaction censorship.

A post-Merge Ethereum soft fork activated by users and OFAC

A post-Merge Ethereum soft fork activated by users and OFAC

As my colleague Nik De said, “Tornado Cash sanctions turn into compliance nightmares. That sounds accurate. Users who interacted with Tornado Cash lost access to decentralized finance (DeFi) platforms, like Aave, which uses Ethereum as its base. On the same subject : NBER Study: One in Five Salvadoran Businesses Now Accept Bitcoin.. It appears that DeFi platforms took the OFAC sanctions to heart and barred users even though there was no evidence of wrongdoing (beyond the use of Tornado Cash).

First of all, the privacy of financial data is important and, above all, it is not reserved for criminals. Second, the immediate complicity of these platforms is troubling and completely against crypto ethics. Cryptocurrencies were created by those who wanted to withdraw from the financial system or felt disenfranchised. It’s very clear (at least to me) that crypto proponents should discourage censorship, if they want to stay consistent.

But this is where it gets interesting. Naturally, users don’t want blanket censorship. Discussions have therefore been circulating on Twitter about a UASF on Ethereum to combat the blacklisting of Tornado Cash users. One group believes that Ethereum’s move from proof-of-work (PoW) to proof-of-stake (PoS) could make UASF feasible due to so-called slashing. In short, slashing is a way to punish validators – who process Ethereum transactions – who misbehave through what effectively amounts to a fine. The basic principles of the UASF would be:

A validator complies with OFAC and censors transactions.

Users get angry and the validator gets hurt.

The validator reverses its behavior or leaves the network.

Except that this scenario poses some concrete problems that the critics do not appreciate. These critics argue that running a full node (like the ones mentioned above) won’t really be possible on Ethereum due to its immense computational need. Running a node on Bitcoin during its UASF was trivially easy by comparison. How could an individual user enforce Ethereum rules if they cannot operate their own full node? By denouncing it on the Internet?

To complicate matters further, one needs to commit 32 ETH (~$55,000) to run a validator on Ethereum. Since this is prohibitively expensive for most users, there are things called staking pools where a user can deposit ETH into a pool of validators controlled by a larger validator, like Lido or Coinbase (COIN). You may not know what Lido (a staking pool) is, but you probably know what Coinbase (a cryptocurrency exchange) is.

Coinbase is, very critically, a US-based company and OFAC is, very critically, a US Treasury Department. So in a world where ETH users are trying to do UASF to fight censorship, what if Coinbase’s validator complies with OFAC sanctions? Well, then Coinbase’s validator is down to nothing. But as we mentioned above, Coinbase runs a staking pool that holds the ETH of, you guessed it, the users themselves.

It’s a real dead end: users want to destroy the Coinbase validator that holds the ETH they themselves Of course, those users could just run their own validators, assuming they have the know-how and capital, but if they’re already placed in a staking pool (which many of them are ), it’s probably because they don’t have those two items.

In Coinbase’s defense, CEO Brian Armstrong has already addressed this dilemma. Lefteris Karapetsas asked staking pools on Twitter what they would do if asked to censor at the Ethereum protocol level, giving them two options: a) comply or b) shut down the staking service to preserve integrity of the network.

Armstrong responded by writing, “…if we did, we would choose B, I think. Focus on the big picture. »

It would be great if that actually happened, but will it? My skepticism stems from the idea that “corporate UASFing,” as Eric Wall put it, could be summed up as corporate UASFing itself. A company-activated soft fork just doesn’t have the same bite as a user-activated fork.

That said, many other technical details have been omitted, and ultimately the view remains speculative. I could very well be wrong and have a UASF done successfully on Ethereum. Finally, I will add that although I am generally an Ethereum skeptic, I think we should avoid actively encouraging a fight against widespread financial censorship. It’s the same battle that bitcoiners are fighting.

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Thomas E.
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Can Ethereum defend itself against the massive US censorship attempt? – Mag Mirror