Privacy on Ethereum: a different approach from Tornado Cash

One of the biggest problems cryptocurrency faces right now is the US government setting a dangerous precedent by criminalizing the largest privacy project in the space: Ethereum's Tornado Cash smart contract.

It's hard to overstate how harmful this is to cryptocurrency adoption. Without privacy, cryptocurrency can never be a mainstream financial instrument for retail and business payments. There is just too much risk in conducting payments on a financial platform that leaks all of your financial activity to the world.

The justification for the sanctions on Tornado Cash is to stop North Korea from laundering the proceeds of its crypto heists through Tornado Cash, but reports since the sanctions were implemented suggest the sanctions have done nothing at all to slow North Korea's crypto theft efforts.

Meanwhile, the sanctions have had a devastating chilling effect on the privacy space on Ethereum, and with it, hopes of a crypto payment system that is viable for mainstream use. This, in turn, has stunted the development of an industry that promised to give liberal democracies, like the US, a significant economic advantage over authoritarian states that naturally reject cryptocurrency. In other words, to marginally constrain the fundraising efforts of a minor geopolitical threat — North Korea — the US has forfeited a major geopolitical advantage over peer rivals like Russia and China through stifling the development of a burgeoning crypto sector centered in the US and its European allies.

Needless to say, I see the potential criminalization of all privacy on the blockchain that the Tornado Cash sanctions portends as disastrous on every front, and worthy of lobbying against at every turn.

One way the crypto space could push back against the surveillance state and its anti-privacy efforts is to develop a legal privacy protocol and make it wildly successful. The more successful a privacy protocol is, the more political protection it has against potentials prohibitions.

So far, standalone crypto privacy protocols like Zcash and Monero have escaped legal sanctions, and I think a strong argument can be made that this is purely due to aesthetics.

The Tornado Cash smart contract address on Ethereum was mistakenly viewed by regulators as a custodian of funds and by a judge as a traditional business contract that could be construed as property of a definable entity (see Van Loon v. Department of Treasury viewing the TC smart contract as property of Tornado Cash's developers), thus becoming a target of sanctions law. In contrast, off-chain privacy protocols like Zcash don't face this issue as their transaction encryption mechanisms that clients call to shield transactions are off-chain, eliminating the misinterpretation of a smart contract address as a custodial address.

So on that basis I asked ChatGPT to devise an Ethereum-based private transaction scheme that avoids the main problem with Tornado Cash: the reliance on constant addresses.

The scheme described is a sophisticated system designed to facilitate private transactions on the Ethereum blockchain without relying on any constant smart contract address. It achieves this through a combination of off-chain computation, zero-knowledge proofs (ZKPs), a dynamic address discovery mechanism, and on-chain verification. Here's an overview of the entire scheme, from setup to execution:

• Setup Phase

  • Development of On-Chain Verifier Contracts: Multiple verifier contracts are deployed on the Ethereum blockchain over time. These contracts are responsible for verifying the ZKPs submitted to them. The addresses of these contracts can change.
  • Implementation of a Dynamic Address Discovery Mechanism: A system is set up to enable the discovery of the current addresses of the verifier contracts. This could be a smart contract that acts as a registry, a decentralized naming service like Ethereum Name Service (ENS), or another form of decentralized identifier (DID) system.
  • Establishment of Off-Chain Computation Nodes: These nodes are set up to handle transaction details (like amounts and recipients) off the Ethereum blockchain. They are responsible for generating ZKPs that prove the validity of transactions without revealing their contents.
  • Creation of an Off-Chain Transaction Pool: A mechanism is established to pool transaction requests. This adds an additional layer of privacy and aggregation.

• Operation Phase

  • Transaction Initiation: A user initiates a transaction by sending its details to an off-chain computation node. This can include the recipient's address, the amount, and other relevant data.
  • Off-Chain Computation and Proof Generation: The off-chain node processes the transaction details and generates a ZKP. This proof attests to the validity of the transaction without revealing any specific details about it.
  • Dynamic Address Lookup: Before submitting the proof to the blockchain, the off-chain node (or the user) uses the dynamic address discovery mechanism to find the current address of the appropriate on-chain verifier contract.
  • Proof Submission: The ZKP is submitted to the discovered address of the on-chain verifier contract.
  • On-Chain Verification: The verifier contract, identified via the dynamic discovery mechanism, verifies the proof. If the proof is valid, it confirms the legitimacy of the transaction.
  • Executing the Transaction: Following successful verification, the transaction can be executed on the blockchain. This could involve updating states, transferring funds, or interacting with other contracts.

How it Avoids Constant Ethereum Addresses - By using a dynamic address discovery mechanism instead of a fixed address for the verifier contract, the system can seamlessly function with changing addresses. - The decentralized and flexible infrastructure, including multiple verifier contracts and a system for dynamically discovering their addresses, avoids dependency on any single contract's address. - Handling sensitive transaction details off-chain removes the need to interact directly with a specific on-chain contract for processing these details.

Advantages - The scheme provides enhanced privacy through the use of ZKPs and reduces blockchain load by offloading computation. - It offers flexibility and upgradability without disrupting existing processes.

Challenges - The technical complexity and dependence on off-chain components require sophisticated cryptography and smart contract development. - Potential latency issues due to the multi-step process, especially the dynamic discovery of contract addresses, could introduce delays.

In summary, this advanced scheme represents a privacy-preserving approach for conducting transactions on Ethereum, circumventing the need for a constant smart contract address.