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- 1 Like liquidity pools, Tornado Cash allows users to deposit a fixed amount of ERC-20 tokens to the Tornado Cash pool.
- 2 It uses a non-interactive Zero-Knowledge proof to confirm tokens withdrawn from the pool.
What is Tornado Cash
Tornado Cash is an Ethereum and Ethereum-compatible token mixer that breaks the link between the origin and destination of the tokens. The need for crypto mixers arose from the demand for more privacy from blockchains.
By design, blockchain technology is transparent. Transactions are added to blocks that are linked to each other and shared in the form of a ledger to a decentralized network. Although blockchains allow users to transact without linking their personal information, the history of the coin can be traced. All this information is stored in the nodes. Also, the transaction history of a wallet can be traced from its public key. If a user transacts from a centralized crypto exchange or an exchange that retains the user’s data, the identity of the user can be revealed from the public address.
To solve this problem, crypto mixers allow users to send coins that are blended with other coins present on the platform and then re-distribute them. If a user sends a mixed coin, the public address that is seen will be of the crypto mixer and not the original address of the user. Also, most mixers erase transaction records on the platform after 24 hours.
How does Tornado Cash work
Tornado Cash is an open-source smart contract protocol built on the Ethereum blockchain that lets users transact ETH and ERC-20 tokens autonomously. It uses a non-interactive zero-knowledge proof. With Zero-Knowledge proofs, users confirm that an asset is theirs without providing information on the asset. Like liquidity pools, Tornado Cash allows users to deposit a fixed amount of ETH or ERC-20 tokens to a pool. To prove that a user truly owns the token, the protocol lets users create a deposit note when sending tokens into the pool. An encoded form of this note is sent along with the token into the pool. The encoded note is recorded on the blockchain while the tokens are mixed with other tokens.
To withdraw, the user supplies the encoded note and the actual note to the platform. Tornado Cash then cross-checks with the encoded notes recorded to ensure that the user has deposited the tokens and that the note has not been used earlier for any withdrawal. Users can only withdraw the tokens they deposited, a person who deposited an ERC-20 token cannot withdraw ETH. This process breaks the link between the origin and destination of the token. A third party cannot trace the original address from which the token was sent.
Summary
The Tornado Cash developers withdrew their control of the platform in 2020. This allowed the protocol to be non-custodial and decentralized and eliminated the possibility of fraud through a rug pull.
In 2022, the U.S. Treasury Office accused the Tornado Cash protocol of being a money laundering tool and banned U.S. residents from using it. $455 million laundered by the Lazarus hacking group was also traced to it.
With a background in journalism, Ritika Sharma has worked with many reputed media firms focusing on general news such as politics and crime. She joined The Coin Republic as a reporter for crypto, and found a great passion for cryptocurrency, Web3, NFTs and other digital assets. She spends a lot of time researching and delving deeper into these concepts around the clock, and is a strong advocate for women in STEM.
