Vitalik Buterin, a co-founder of Ethereum (ETH), along with core developer Ameen Soleimani, Chainalysis’ Jacob Illum, and academics Matthias Nadler and Fabian Schar, have jointly written a research study about a new privacy protocol called “Privacy Pools.”
The study proposes this framework as a possible successor to Tornado Cash, a privacy-focused service that has recently encountered regulatory challenges. Privacy Pools is structured as a “smart contract-driven protocol for enhancing privacy,” aiming to strike a balance between financial confidentiality and legal oversight.
By using advanced cryptographic methods such as zero-knowledge proofs, the protocol can confirm the legitimacy of a user’s funds without disclosing their full transaction history. The essence of Privacy Pools relies on creating a “separating equilibrium,” a concept introduced by the authors to characterize a system capable of filtering out unlawful funds while remaining in line with regulatory requirements.
This approach makes it feasible to conduct both private and lawful financial transactions, a challenge that has long plagued the blockchain sector. In simpler terms, the protocol allows users to demonstrate the legality of their assets without exposing their entire transactional history.
The authors also set the scene by mentioning Tornado Cash, an earlier contender in the blockchain privacy space. Although Tornado Cash was useful for transactions focused on privacy, it ran into legal troubles for allegedly enabling transactions linked to the North Korea-associated hacking group, Lazarus. As of August 2022, the service was placed on a blacklist by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), emphasizing the need for a more nuanced approach to balancing privacy and regulatory concerns.
The unveiling of Privacy Pools aims to revolutionize the way financial transactions are conducted on the blockchain. The authors argue that integrating privacy with regulatory compliance could have long-term benefits for the sustainability of cryptocurrency.
If Privacy Pools proves effective, it could offer a blueprint for achieving financial privacy in a way that is also compliant with regulations.