Tornado Cash Sanction Prompts User Bans and Backlash

Crypto was supposed to be unstoppable. 

But when the U.S. Office of Foreign Assets Control (OFAC) sanctioned the privacy-preserving protocol Tornado Cash on Aug. 8, the conception of crypto as an uncensorable financial network came into doubt.

Could the crypto ecosystem withstand government prohibitions? When a series of DeFi applications blocked addresses after OFAC’s sanctions it seemed not.

Antithetical to Crypto

The applications by and large blocked the addresses on their frontend, meaning at the user interface level, rather than at the smart contract level. So while more technical users may be able to circumvent blacklisting, it’s clear that average users can be cut out of DeFi at the frontend level, which some believe is antithetical to crypto’s mission.

This development has spurred debate in the DeFi community on how to respond to this new threat, and sent technologists and founders searching for new ways to redesign business models and ways to interact with users.

Banned Users

The derivatives trading protocol dYdX was one of the projects which banned users at the frontend level. Antonio Juliano, founder of dYdX, reframed the question of “why are DeFi frontends banning users” to “why can those frontends ban users,” on Twitter.

“There’s been a huge amount of pushback to DeFi frontends banning users,” he tweeted. “The standard question is: why are you giving in to the government and banning users? I thought this was DeFi! A better question would be: Why are you able to ban users?!”

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As Juliano suggested, the solution may be to decentralize, or distribute control of the frontends of DeFi applications. This would make them as censorship-resistant as many of the smart contracts they interface with.

It’s complicated — there are different technologies that make up a frontend. There’s file storage. There’s the Domain Name System (DNS) which functions somewhat like a sophisticated phonebook. If a site requires more than static files, cloud services are needed. 

The Blockchain Layer

To understand the world of decentralized frontends further, The Defiant talked to Daniel Helm, a former developer evangelist at the recently shuttered Skynet Labs, a company which contributed to the decentralized data protocol. Helm listed a host of technologies related to frontends beyond data storage which already had blockchain-enabled decentralization. 

To Helm, web browsers themselves aren’t well-equipped to facilitate decentralized frontends. “Given that our browsers aren’t designed to understand the protections of these protocols, we’re still far from seeing a user experience that matches the level of protections we see at the blockchain layer,” he said.

The standard question is: why are you giving in to the government and banning users? I thought this was DeFi!

Antonio Juliano

Other technologists specializing in the decentralized frontend problem see different challenges. Joe Deng, social media manager at Akash Network, a peer-to-peer computing provider, sees education as the main hurdle for decentralized frontends. 

“It is a lot easier to use the structures that already exist,” Deng told The Defiant. “If you’re a cloud engineer on a project, you probably grew into it with [Amazon Web Services].” 

Big Money

While decentralized frontends have largely taken a backseat to hot areas like DeFi and NFTs, interest in the space is heating up, said Deng. He cited issues like hosting provider Hetzner banning mining related activities on their servers as another reason for decentralization.

Nikita Rykov, who identified himself as a key member of Handshake, aims to decentralize DNS, as well as Arweave, which is a data storage protocol. Rykov echoed Deng in telling The Defiant that decentralized frontend technologies are attracting more attention.

Hetzner

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 “Some projects are ready to pay big money to make their frontends available in a fully decentralized way and against all censorship,” Rykov said. 

The developer is working on a solution called Elymus which will allow other developers to build what he said were truly decentralized apps.

Public Trust

Others, like Skynet Labs’ Helm, aren’t sure of the potential profitability of decentralized frontends. “I doubt there’s a straightforward business model for decentralized frontends as they exist now,” he said, adding that it’s better to view decentralized frontends as a public good to further the crypto community’s goals of developing a permissionless system.

“It will be an essential part of increasing public trust in the ecosystem, even if most users won’t know what a ‘decentralized frontend’ is.” 

No Frontend

Helm does see a workaround to the technical hurdles of developing a decentralized frontend — don’t build one at all. “This means users will have to use other products to interact with their smart contracts from the browser,” he said. “Given the current regulatory environment, I can’t blame teams for doing this, but [I] think this puts users in a more uncertain position to know which products to trust.” 

At least one project has already put Helm’s idea into action. Liquity, a collateralized lending protocol like MakerDAO with $545M in total value locked, according to The Defiant’s Terminal, launched in 2021 without deploying a frontend.

Liquity’s TVL in last month. Source: The Defiant Terminal

Instead, Liquity incentivizes other developers to build frontends by rewarding them with the protocol’s native LQTY token. So far, 18 frontends for Liquity have been built, according to the frontend section of the project’s website. 

Bojan Peček, head of operations at Liquity, told The Defiant that the team behind Liquity chose the decentralized frontend model as part of an overall strategy to build a lending protocol optimized for resilience.

Forms of Resiliency

“When you decentralize the frontend you still have just one target,” Peček said. “By decentralizing operators you have many.” 

Not that the Liquity’s head of operations is against decentralizing the frontend on a technical level. Peček said he is supportive of all forms of resiliency, be it with a decentralized frontend or a distributed model like Liquity’s.

Unified

If anything, the crypto community seems unified in its desire to see not just smart contracts, but also frontends reach higher degrees of decentralization. 

David Vorick, who founded Sia, another decentralized storage system whose Siacoin has a $208M market capitalization, thinks decentralization is close to an all-or-nothing imperative.

“Decentralization isn’t something where you can stop halfway,” he told The Defiant. “It’s like a leaky boat. If half the boat has holes in it the entire boat will sink.”

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