A research paper authored by Ethereum co-founder, Chainalysis researcher Jacob Illum, and early Tornado Cash contributor Ameen Soleimani introduces Privacy Pools, a method to enhance privacy on public blockchains such as Ethereum while ensuring adherence to regulatory requirements.
Privacy Pools is a privacy-enhancing protocol that utilizes zero-knowledge (ZK) technology to prove compliant transactions without users disclosing their entire transaction history.
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The key ideas are:
- Using zero-knowledge proofs to hide the link between deposits and withdrawals in a privacy protocol such as Tornado Cash. This can effectively conceal a user’s transaction graph.
- Allowing users to create “associated sets” — groups of contributions from which their withdrawal may have originated. This ensures privacy within a specified set.
- Users can prove their inclusion in compliant sets, e.g., excluding known illicit deposits, without disclosing exactly which deposit was theirs.
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- Honest users are strongly incentivized to prove membership in compliant sets, while illicit users cannot. This dynamic establishes a clear and distinct separation between the two groups.
- Association sets can be formed in various ways, such as only including KYC’d (Know Your Customer) users or excluding deposits considered high-risk. These different sets may comply with different regulatory requirements.
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- Users don’t reveal their association sets publicly, disclosing only a commitment. Sets are published by providers off-chain.
- Users can still provide direct proofs to counterparties if necessary, albeit with reliance on trust.
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- For rapid re-spending, users share transaction history to show that the ultimate origin is compliant.
- Special access or inclusion in special lists creates risks of centralization, while the voluntary disclosure model provides greater flexibility.
A detailed explanation of each of these ideas and how the protocol should be working can be found in this excellent review.
The community’s first reaction to the Privacy Pools proposal was rather mixed, though. Paradigm co-founder Fred Ersham called it “the most important tool we have to address regulatory challenges while maintaining privacy on public blockchains.” While the Bitcoin Developer Matt Corallo, for example, described Privacy Pools as “absolutely awful.”
Chris Blec, a strong decentralization advocate, emphasized the fundamental difference between privacy and control, arguing that while Privacy Pool users could gain privacy, they could potentially lose control. Blec described Buterin’s proposal as an attempt to “appease tyrants” and thus betray the developers who created Tornado:
