Contagion from the U.S. Department of the Treasury’s move to sanction privacy protocol, Tornado Cash, continues to spread.
dYdX, the derivatives trading protocol, said on Aug. 10 that it has banned certain blockchain addresses as a result of the Tornado sanctions levied on Aug. 8. Many of the banned addresses had never directly engaged with Tornado Cash, according to dYdX.
dYdX released the information roughly two hours after a banned user, egor, posted a screenshot showing that his account had been banned.
dYdX employs a compliance vendor which flags questionable addresses. The protocol went on to ban the flagged addresses before reinstating certain accounts which were actually in compliance, explained the dYdX team.
As of Aug. 11, some users are still expressing frustration about being banned over a nominal deposit into Tornado Cash three years prior. Many DeFi users would have undoubtedly interacted with the privacy protocol for the $TORN airdrop.
In response to the bans, data dashboard L2BEAT has produced an alternative interface which allows users to withdraw their assets from dYdX even if they are banned.
Centralization In DeFi
dYdX’s move to ban addresses has further underscored the centralization across the DeFi ecosystem. One of DeFi’s key tenets is that it can be used by anyone, anywhere. With the Treasury sanctioning Tornado Cash, Circle banning addresses, and now dYdX doing the same, the concept of censorship-resistant smart contracts is being tested.
Sanctioning a protocol is new territory. By design, smart contracts are supposed to be uncensorable, hosted on the blockchain with transactions processed by a decentralized network of nodes. With the contracts out of anyone’s control, the onus falls on those interacting with those contracts or interacting with entities interacting with those contracts, to fall under compliance.
No doubt this is a messy task.
dYdX hasn’t claimed to be fully decentralized — the protocol released plans in January to do so by the end of this year. dYdX founder Antonio Juliano said on Aug. 8 that the protocol would have to block certain addresses to comply with US authorities.
dYdX did not immediately respond to The Defiant’s request for comment about whether the protocol will need to comply with sanctions such as the Treasury’s if plans to fully decentralize are successful.
Compliance with the Tornado sanctions isn’t straightforward. “As a smart contract-based mixer, sanctioning Tornado Cash isn’t as simple as sanctioning a centralized service like Blender.io or Hydra Market, as it can’t simply be shut down,” says a report by Chainalysis, a company which provides blockchain monitoring and analysis services.
Blender.io is a Bitcoin mixing service which was sanctioned by the U.S. Treasury in May.
Hydra Market was a Russian marketplace and crypto mixing service that the U.S. and German governments shut down as part of a joint operation in April. Unlike Tornado Cash, Hydra Market could simply be shut down through the seizure of its servers.
As dYdX, Centre, and others struggle to comply with U.S. authorities’ sudden move, how crypto participants adapt is likely to have lasting effects on an industry which has prided itself on its inability to be controlled by centralized entities like governments.