This fall, Ethereum reached a widely noted milestone, in which 51% of it’s transactions passed through nodes that comply with US OFAC regulations.
Specifically, this means that many processing nodes refuse to handle transactions involving Tornado Cash, which is banned for violating US sanctions. Tornado Cash transactions are still on the blockchain, but they are treated as second class citizens.
It is estimated that if about 2/3 of validaters comply with sanctions, Tornado Cash will effectively be ousted.
This apparently effective US government action has provoked a great deal of hand wringing and fiery rhetoric about “censorship” and Nakamotoan values. As Sam Kessler notes, there has been considerable difference of opinion between the “core community”—Nakamotoan fundamentalists—and “new folks”—interested in conventional finance [1]. The former absolutely will not tolerate this regulation, the latter consider it normal and probably essential.
The 51% milestone presumably indicates that a lot of the new “validators” are coming out of conventional finance, or are organized in the US. These folks are already regulated, and, in fact, benefit from regulation.
On the other hand, as Kessler suggests, the vast majority of users—most of who are not paying to run validators—do not want regulation, and use Ethereum in part to avoid regualtions.
This split may matter, because the only conflict resolution method available in Nakamotland is forking. In this case, the fork would create an OFAC compliant Ethereum and an OFAC non-compliant Ethereum.
What could that possibly mean?
I’m pretty sure this would not be “two versions of the chain: one regulated, one not.” (per Kessler), but rather two there would soon be two competing systems. And I predict that it won’t be possible to support two branches for very long.
The question is, if and when this happens, who will win? Which branch will be the “official” Ethereum?
We know what the US government will say, but what about Vitalek and friends? What about the users and the big money say?
The non-compliant branch might have more users initially. But the Ethereums’s PoS depends on stakes and validators, and there is a lot of money that wants or needs to be OFAC compliant. So, it isn’t clear whether bodies or dollars will matter more.
This fork may be inevitable. Forking away from problems is the way Nakamotoland does things.
But I have to think it will not work the way the fundamentalists hope. Aside from the inconvenience of dealing with two different Ethereums, the two chains will formalize compliance in a way that is extremely convenient for the US government. If you use the OFAC compliant branch, it’s fine. Otherwise, you are non-compliant and we treat you as sanctions busters.
I’ll also note that Ethereum just spent years branching to PoS. Just how much time and effort are available for this OFAC compliance fork? I mean, if it takes a year or more, it may not actually matter by the time it’s done.
We’ll stay tuned.
This story certainly puts Ethereum in the running for CryptoTulip of the Year!
- Sam Kessler (2022) Will Censorship Fork Ethereum? Coindesk, https://www.coindesk.com/tech/2022/10/19/will-censorship-fork-ethereum/
Cryptocurrency Thursday
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