Ethereum (ETH) co-founder Vitalik Buterin has recently contributed to a research paper that delves into the development of a privacy protocol called Privacy Pools. This protocol aims to address concerns regarding existing privacy platforms like Tornado Cash while advocating for a balance between financial privacy and regulation.
Collaboration and Overview
The research paper was a collective effort by several industry veterans and experts. Alongside Vitalik Buterin, the paper saw contributions from core developer Ameen Soleimani, Chainalysis researcher Jacob Illum, and academics Matthias Nadler and Fabian Schar. The paper describes Privacy Pools as a “smart contract-based privacy-enhancing protocol” that utilizes zero-knowledge proofs to validate user funds without compromising the complete transaction history.
The Significance of Privacy Pools
The main objective of Privacy Pools is to establish a “separating equilibrium” that distinguishes funds associated with criminal activities while maintaining a balance between privacy and regulatory requirements. This is achieved by allowing users to publish zero-knowledge proofs, providing evidence of the origin of their funds without revealing the entire transaction graph. This innovative approach offers a potential solution for verifying the legality of funds while preserving transactional privacy.
“The core idea of the proposal is to allow users to publish a zero-knowledge proof, demonstrating that their funds (do not) originate from known (un-)lawful sources, without publicly revealing their entire transaction graph,” the paper stated.
The paper acknowledges the usefulness of platforms such as Tornado Cash in maintaining privacy; however, it also sheds light on their vulnerability to misuse by illicit actors. Tornado Cash faced legal challenges in the past when it was accused of facilitating transactions for the North Korea-linked hacking group Lazarus. In response, the US Treasury Department’s Office of Foreign Assets Control took action and blacklisted Tornado Cash in August 2022 for its alleged involvement in illicit activities.
By exploring the concept of Privacy Pools, Buterin and his collaborators aim to address the concerns raised by Tornado Cash’s legal troubles while advocating for a privacy protocol that aligns with regulatory requirements. They believe that privacy and regulatory compliance can coexist, stating, “In many cases, privacy and regulatory compliance are perceived as incompatible.”
Aside from his collaboration on the Privacy Pools research paper, Vitalik Buterin has expressed his concerns regarding the centralization of nodes within the Ethereum network. Currently, the majority of the 5,901 active Ethereum full nodes are run on centralized platforms like Amazon Web Services (AWS). Buterin hopes that in the future, fully verified Ethereum nodes can operate on mobile devices, aiming to address the issue of centralization and make the network more decentralized.
