Notes 8/12: Chandler Guo’s Crusade, the Tornado Cash Circus

Chandler Guo is what is known as an OG (Original Gangster, for the uninitiated) in crypto circles. A former beef salesman, Guo made his cryptocurrency millions by setting up a mining farm in Inner Mongolia and selling it for a massive payday during the asset class’s early days. He reportedly lives in a California mansion now and owns an estate, where he grows vegetables and makes wine.

Even in his semi-retired state, Guo maintains links to cryptocurrencies.

This morning, he appeared on Coindesk TV to plead the case of Ethereum miners affected by the cryptocurrency’s move to a Proof of Stake (PoS) mining system. The move will make many of their current investments in Proof of Work (PoW) infrastructure, such as ASIC machines, redundant because the new mining algorithm will not require solutions to mathematical puzzles.

Instead, staking of ether, Ethereum’s native cryptocurrency, will determine the rights to ‘mine’ the cryptocurrency. “For the [current Ethereum] miners, they will be abandoned [after its move to PoS],” said Guo. So, he suggests that the PoW chain continue operations, even after there are no transactions recorded on it, as a separate entity and, most importantly, with their own token.

Guo’s crusade to keep the PoW chain is not personal; he told Coindesk that he mines tokens for decentralized finance (DeFi) protocols. Such tokens are used for staking purposes and generate revenues from their high yields. [A decrease in its quantity after the Merge is also expected to drive up yields for Ethereum’s ether].

A Profitable Token

What then drives his interest in a new chain? Profits, of course.

As I explained earlier, the move to retain Ethereum’s PoW chain is underpinned neither by economics or altruism. It is a naked cash grab using a token that will become worthless in a very short period of time. But that seems to be beside the point for most crypto exchanges and trading venues, who are already setting the stage to make markets in it.

For his part, Guo admitted as much during the conversation. Asked what he would do with the new chain’s token, he said he would hold it until the next crypto bull run in two years.

A Decentralized Ethereum?

Another troubling aspect of the conversation with Guo relates to the power exerted by the Ethereum Foundation on its workings. Ethereum claims to have a decentralized setup where a community consisting of various stakeholders, including miners, within its ecosystem take collective decisions about its future. Based on Guo’s interview, however, it would seem that miners do not have much of a say. He pointed out that profits accruing to traders and holders of the Ethereum cryptocurrency were due to the “hard work” put in by miners. But they had to approach him in order to communicate with the Ethereum Foundation.

The Tornado Cash Circus

On one front, however, Ethereum is decentralized: its nodes. And that is working out to its advantage in its latest fracas involving the US government. The network’s global presence means that the sanctioning of crypto mixing service Tornado Cash, which is a decentralized app on the Ethereum blockchain, has quickly turned into a circus.

While Tornado Cash code is not available on US-based and Microsoft-owned GitHub, it has been duplicated outside the country’s borders. It is possible to transfer money into the service using crypto wallets. And funds are being transferred to addresses containing celebrity names in their addresses. That last bit is made possible by the Ethereum Name Service which does not require a login or ID and can be assigned to any name. In short, the effort by OFAC to ‘ban’ Tornado Cash has backfired and rightly so.

Crypto purists have been quick to pounce the government’s move and decry the assault on free speech. While open-source code has previously been ruled as free speech, it does not mean that the government cannot place constraints on it. Several forms of free speech work in bounded constraints for the good of society.

Tornado Cash As Public Good

Some are pushing forward pushing forward a dubious theory about Tornado Cash being a public good. That might not quite be the case. The service is free to use and is non-rivalrous and non-excludable – two characteristics of such goods. But it is no public highway that connects two market towns.  

It’s public benefits – another quality of public goods – are doubtable. Anonymizing transactions in an industry already infamous for its links to criminals hardly serves as a public good. There are also no clear or documented use cases for the service. Ethereum’s cofounder Vitalik Buterin claims to have used it to donate ether anonymously. There are alternatives in crypto (admittedly, more complex) to do this. A further murky aspect of its service is the use of a token, that even experts claim is not necessary, to conduct transactions for the service.

It may be difficult to censor Tornado Cash but replacing it should not be impossible.

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