Tornado: Decentralization’s Great Victory over Traditional Law

Source: Liu Jiaolian

Overnight, BTC continued to consolidate around 95k. Last night, it was mentioned that the Fifth Circuit Court of the United States ruled on Wednesday in the case of OFAC (Office of Foreign Assets Control of the U.S. Treasury Department) sanctioning Tornado that "immutable smart contracts" on the blockchain cannot be sanctioned according to current laws.

This is a bright moment for the spirit of the rule of law. This is a great victory of decentralization over traditional law.

To understand the significance of this ruling, we need to first understand: What is blockchain? What is a smart contract? What is an immutable smart contract? What is Tornado?

As we all know, blockchain is an automatic accounting system independently maintained by many unspecified entities. These independent entities do not belong to the same company or organization, but act on their own, and are even scattered all over the world, lacking centralized control. This highly loose way of collaboration between people is called "decentralization."

This way of collaboration is the product of human civilization evolving to an advanced stage, starting with the invention of the Bitcoin system by Satoshi Nakamoto in 2008 and the launch of it in 2009. Before that, all large-scale human collaboration, from companies to countries, was centralized. In the centralized model, the underlying color to ensure the achievement of cooperation is "violence", or "top-down coercive force", which can also be called "legal right to harm."

See the big picture from the small. Think about it, why are you always cautious when you are at work, for fear of offending your leader and being bullied? In essence, it is because your leader, as your superior, has the legal right to harm you. Although the leader may not necessarily use this power against you, it is like a sword of Damocles hanging over your head at all times, making you nervous and trembling all the time. After being domesticated for a long time, you will subconsciously look up to the authority of the leader, obey the instructions of the leader, and even develop Stockholm syndrome, and be grateful for the leader's reward for giving you a bite of food.

Why do subordinates of the opposite sex in the workplace sometimes half-heartedly accept the leader? In essence, it is the comprehensive exploitation of superiors from subordinates from the spirit to the body caused by the centralized power construction.

Therefore, decentralization is nothing less than another great liberation of the human spirit and even the body. In a truly decentralized system, there is no leader, no authority (or authoritarianism), no violence, no oppression, and no legal harm. Here, everything is based on your voluntary, autonomous, and spontaneous. Here, no one can force you to do anything. Here, you have the highest level of freedom - the freedom to say "no".

The state is the highest form and largest collection of violence ever constructed by human civilization. Government departments are the tools for the state to implement this powerful and violent collection both internally and externally. Traditional laws are the instructions for using tools.

The United States is currently one of the most powerful countries on earth. This sentence means that it has the most powerful and fiercest violence on earth. OFAC, the full name of which is Office of Foreign Assets Control, is a department of the U.S. government. The department's responsibility is to implement economic and trade sanctions related to U.S. national security and foreign policy. Its sanctions are mainly aimed at entities or individuals outside the United States that pose a threat to the United States.

Tornado, also known as Tornado Cash in English, is a set of smart contract codes running on the Ethereum blockchain. The function of this set of smart contract codes is to mix the digital currencies that have been entered into a pot, and then serve them separately and put them in each person's bowl. This is called "mixing coins." Obviously, the "coin mixing" function has a natural illegal use - money laundering.

So, what is a smart contract? Smart contracts are actually computer codes, or computer instructions. Unlike traditional codes that run on ordinary computers or servers (clouds), smart contracts are computer codes that run specifically on blockchains.

What is the difference when running on a blockchain? As we said above, the characteristic of blockchain is decentralization. Once these codes are deployed on the blockchain, they cannot be modified (even if there are bugs, they cannot be withdrawn or corrected, and you can only watch it go wrong), nor can they be restarted or interfered with at will, even by the original developers and deployers - of course, technically speaking, unless the developer leaves a "backdoor" code in the code specifically for controlling the smart contract.

So, it is clear to us here that if the blockchain used is a truly decentralized blockchain (not a pseudo-blockchain controlled by a company), then the smart contracts running on the blockchain can be divided into two categories:

One ​​category is smart contracts with control backdoors. This is a variable smart contract.

The vast majority of smart contracts operated by a company have various backdoors. For example, in the smart contract of USDT, Tether has the "backdoor" authority to freeze the assets of any address at will. For example, almost all smart contracts of cross-chain bridges are so-called "upgradeable smart contracts", and the development team behind them has a special "backdoor" to change the contract logic at any time.

The other category is smart contracts without any control backdoors. This is what we initially called "immutable smart contracts".

Examples in this regard need to be carefully selected. Because to be honest, in the field of blockchain, teams that do things so "particularly" can be said to be extremely scarce! Jiaolian gives three examples:

The simplest example is WETH. This smart contract is immutable once deployed, and no one can have control over the contract.

The second example is Uniswap. Although there is a company behind Uniswap, Uniswap Labs, this team is very particular about what it does. You can see that every time a new version of V1, V2, V3, and V4 is launched, it has to be redeployed, just because you can see from its open source code that it is implemented as an immutable smart contract and cannot be upgraded in situ. As for the control of the fee switch inside, it is handed over to the governance contract and controlled by the community, thereby eliminating the last single point of control.

And the third example is the protagonist of today's story: Tornado Cash.

In August 2022, the U.S. Treasury Department imposed sanctions on Tornado for allegedly facilitating more than $7 billion in illegal transactions, including funds related to North Korea's "Lazarus Group."

In August 2023, two Tornado developers, Roman Storm and Roman Semenov, were indicted for suspected money laundering and sanctions violations. In May 2024, another developer, Alexey Pertsev, was convicted of laundering $1.2 billion and sentenced to 64 months in prison.

OFAC's so-called sanctions smart contracts cannot stop the code from running, but indiscriminately harm everyone associated with it - arresting developers and requiring all exchanges to freeze and ban all users' funds from Tornado.

To give an example, it is like a gangster chopped someone with a kitchen knife, so OFAC arrested Wang Mazi and Li Xiaoer, who produced the kitchen knives, and then notified the whole society to confiscate the kitchen knives in everyone's hands.

So some users were angry. In anger, they sued the U.S. Treasury Department.

In September 2023, Joseph Van Loon and other plaintiffs filed an appeal, questioning the sanctions imposed by the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) on Tornado.

The plaintiffs argued that OFAC considered Tornado's immutable smart contracts to be "property" that could be sanctioned, exceeding its authority under the International Emergency Economic Powers Act (IEEPA). The appeal was filed after the district court ruled in favor of OFAC's action.

Time has come. In November 2024, the U.S. Fifth Circuit Court ruled that the Treasury Department was found to have exceeded its authority by sanctioning Tornado's immutable smart contracts.

The Fifth Circuit Court held that when smart contracts are immutable, that is, no entity can modify or control them, they cannot be classified as "property" that can be sanctioned under existing laws. The court pointed out that the immutable smart contracts involved in this case "are not property because they cannot be owned."

This ruling overturned the decision of the lower court and was regarded by industry authorities as an important victory for privacy advocates and blockchain developers, providing clear legal guidance for the development of similar products.

Of course, mutable smart contracts with control backdoors are still at risk of sanctions. OFAC can choose to sanction people or companies that control smart contracts.

One ​​small step for a tornado, one giant step for mankind.

We also understand more deeply from this case the importance of "giving up control".

Satoshi Nakamoto had a clear mind and was ready to give up all his control over the Bitcoin system from the beginning. He even gave up all his real influence and chose to become an eternal legend.

The Uniswap team, or its founder Hayden Adams, also deeply understood the core meaning of this decentralization, so when building the system, they made a good design.

Even if I am gone, the system I delivered will continue to run.

If I am gone, each of you is me.

This is the greatest value of decentralization.

References:

- [1] https://decrypt.co/293758/fifth-circuit-rules-ofac-overstepped-sanctioning-tornado-cashs-immutable-smart-contracts