Ethereum Milestone: More Than 50% Compliance with Sanctions

This summer, Ethereum finally switched over to the Proof of Stake validation protocol.  The selling point of this change is, of course, that PoS consumes far less electricity than Nakamoto’s Proof of Work.  But PoS is more “centralized” than PoW, and the current implementation of has mechanisms that can allow validators to “censor” transactions.

This year the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash for trading with prohibited entities.  Blockchains based on Nakmotoan PoW have no ready mechanism to implement such “censorship” (though there are plenty of other pinch points), but the new Ethereum does, sort of.

Which has generated plenty of fiery rhetoric, and more than a little curiosity whether trying to filter out Tornado Cash would actually work.

If I understand correctly, one way it works is at the point of so-called “relays”, which are basically marshalling yards for new blocks.  In the new Ethereum, a transaction is submitted to such a relay, which sorts and packs transactions into batches, and then pushed the block out to the blockchain to be confirmed.

The upshot is that a relay can simply ignore some transactions.  In the face of sanctions, relays operated by organizations subject to US law can simply not process transactions involving sanctioned parties.  Whether they will do so was an open question, as was just how much difference that might make.  Anyone can run a relay, after all, and some are designed to ignore OFAC.

So how is this Ethereum “censorship” actually working?

Apparently, it’s working.

In fact, it looks like in one 24 hour period, more than 50% of the blocks were processed by OFAC compliant relays [1]. With one thing and another, this means that the sanctions are having a growing effect on Ethereum transactions, in that it is becoming more difficult to violate sanctions via Ethereum.  Or, as fundamentalist Nakamotoans put it, “Ethereum doesn’t seem to show any signs of censorship resistance for now”. [1]

The “transparency” of the Ethereum blockchain makes it possible to get a view of whether relays are really enforcing sanctions or not.   Which is useful, because the organizations running relays seem to be weaseling about what is going on.  Nijkerk provides several indecipherable statements from such organizations, which seem to be trying to comply with sanctions while promising not to do so.

At this time, there are a handful of relays that are enforcing the sanctions (as far as we can tell), and they have been extremely popular. I.e., the reported “51%” reflects the popularity of relays that implement the policy.

If so, we are seeing that a lot of people want to use a network that follows these rules, or at least want to stay in good graces with the US government by not mixing with prohibited traffic. So, given the freedom to choose, people are choosing to comply.

Obviously, this situation could change if users shift their traffic to non-complying relays, or the relays change.  So, we’ll have to see.

But for now, for better or worse, it seems that Ethereum PoS is, in fact, partially “censoring” sanctioned traffic.

---

1. Margaux Nijkerk (2022) Censored Ethereum Blocks Hit the 51% Threshold Over the Past 24 Hours. Coinbase,  https://www.coindesk.com/tech/2022/10/14/censored-ethereum-blocks-hit-the-51-threshold-over-the-past-24-hours/

Cryptocurrency Thursday