This means that, even when interacting directly with smart contracts, blacklisted addresses would not be able to transact or operate in the base layer.
Upcoming merger event triggers concerns in crypto circles
The Merge, Ethereum’s migration from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus algorithm, has raised concerns about the blockchain’s future in censorship. After the addresses of the Tornado Cash smart contracts, a privacy-centric mixing protocol, were sanctioned and blacklisted by the U.S. Treasury’s Office of Foreign Assets Control, Ethereum’s privacy- and censorship-resistant nature was thus highlighted.
Gabriel Shapiro, the general counsel of Delphi Digital, believes that that the big Ethereum validators will try to push for a measure that brings censorship to the protocol level. This would allow them to operate within the rules, and also avoid being penalized for not including illegal transactions. In this regard, he said that these entities “cannot self-help by simply avoiding facilitating blocks containing U.S.-sanctioned transactions, because under certain conditions they could be dramatically penalized for doing so.“
On the other hand, Discusfish, co-founder of F2pool, an ethereum and bitcoin mining pool operation, said that proof-of-work (PoW) consensus assets were better able to cope with regulatory pressure than their proof-of-stake based counterparts. He explained:
In the discussion of PoS and PoW under regulatory pressure these days, there is a key point to pay attention to: If the block producer can remain anonymous and package certain consensus-compliant transactions on the chain (which may contain certain sensitive transactions). PoW can currently do this, PoS currently faces some difficulties due to the need to stake assets on the chain.
However, not everyone shares this view. In fact, some believe that proof-of-stake consensus-based assets, such as post-merger Ethereum, are better prepared to deal with a censorship attack from government regulators. Justin Bons, founder and CIO of Cybercapital, is one of them.
Justin Bons argues that while an attack of this nature would be very difficult to carry out against Bitcoin and Ethereum, the complexity and physical presence required to operate PoW-based chains would make them easier to target than proof-of-stake-based assets. This is because PoS chains can be operated with low-power equipment from anywhere in the world.
14/14) Regulators are not out to destroy us
As we have crossed the rubicon (the point of no return)
For better or for worse
A healthy middle ground must be found which preserves the credible neutrality of blockchains
Ensuring privacy for individuals & compliance for companies
– Justin Bons (@Justin_Bons) August 19, 2022
Finally, Justin Bons estimates that regulators are not yet ready to hurt crypto-currencies and that “a middle ground must be found that preserves the credible neutrality of blockchains, ensuring individual privacy and corporate compliance“.