Tornado Cash and Blockchain Privacy: A Primer for Economists and Policymakers
Matthias Nadler, Fabian Schär · 2023
It is difficult to retain privacy on a public blockchain.In contrast to popular belief, permissionless blockchains are completely transparent.All confirmed transactions are publicly observable and stored as part of the blockchain's history.The users' identities are only protected through the use of addresses that act as pseudonyms.This setup allows public blockchains to operate without any intermediaries and creates a system where everyone can mathematically verify the legitimacy and integrity of transactions as well as the current state of the ledger; but the setup raises severe privacy concerns.If someone obtains information that allows them to link a blockchain address to an entity, they may effectively observe that entity's entire transaction history and associated activity.Even if the entity uses multiple addresses, any link between these addresses may expose the fact that they belong to the same person.Moreover, the immutable and public nature of the data creates a setting where the data accrues over time and will always be available for analysis.The algorithms and tools to analyze the data will become more sophisticated, off-chain data more abundant, and computational constraints less relevant.