Tornado Cash Reflection: On Stablecoins, Custodianship, Dollarization of Web3, & Privacy.

Carter Woetzel
7 min readAug 12, 2022


A historic moment for Web3 occured on August 8th, 2022— the sanctioning via the United States Treasury of a permisionless application built on Ethereum called Tornado Cash, creating a watershed moment for the dynamic between blockchains and sovereign nations. The fundamental value of blockchain has always been embedded into the attributes of decentralization and permisionless participation, giving users the power to self custody their assets and traverse apps in a permisionless fashion regardless of their identity and location.

Have an internet connection? Welcome to a global interconnected financial ecosystem that transcends borders, creed, and countries.

Until today.

Web3 is at an ethical crossroads.

Comply, or be cast out.

Github. Infura. Oasis. Alchemy Platform. USDC. Circle.

All taking actions to protect themselves from sanctions by denying service to users that were sanctioned (fairly or not) by the US treasury.

All of these businesses and entities chose to comply with the United States sanctions on Tornado Cash. Anyone who has used the service of Tornado Cash, regardless of whether usage was for perfectly legitamite reasons, is complicit with OFAC.

“As a result of today’s action, all property and interests in property of the entity above, Tornado Cash, that is in the United States or in the possession or control of U.S. persons is blocked and must be reported to OFAC. In addition, any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons are also blocked. All transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or otherwise blocked persons are prohibited unless authorized by a general or specific license issued by OFAC, or exempt. These prohibitions include the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any blocked person and the receipt of any contribution or provision of funds, goods, or services from any such person.” -US Treasury

What are some reasons a user would want to use Tornado Cash privacy features?

  • Purchase a product without having other vendors be able to track your purchase metadata
  • Keep employee payments private
  • Keep contractor payments private
  • Tipping
  • Anonymously donate to a specific cause (perhaps polarizing)
  • Donate to a person anonymously
  • Maintaining privacy with app interactions
  • You are being harrassed online and want to remain anonymous
  • Perhaps you want to separate your real world identity from your crypto address. What if friends, family, and others are able to see how much wealth you hold on the blockchain? This is a potential security and cultural risk.
  • You think crypto will achieve mainstream adoption meaning everyone will have access to all this information (retailers, banks, potential employers), and you question if they will use the information ethically.

Things got even worse, on August 12th (2022) a 29 year old Dutch programmer who helped contribute to Tornado Cash was arrested. Imagine the absurdity of this: contributing to open-source code as something dangerous and illegal. This is an outright attack on free speech.

Reza said it best: “If you have the privilege of not needing privacy, then you have the privilege of not being scared of your government.”

The Immutability Of Permisonless Participation

After the sanctions were announced, protocols immediately began to pose the question: “…if we are sanctioned as a protocol, do we have the ability to blacklist addresses from using our service in order to remain compliant?” To posit such a question is to immediately call into question what I call the immutability of permisionless participation. Before we can talk about participation, we must start with the bedrock of blockchain. Originally, one of the fundamental attributes that give blockchain its value is the immutability of correctness — due to the decentralized and redundant computation and chain of custodianship, blockchain is able to deliver trust between mutually distrustful parties.

A transient promise that was implicitly guaranteed from bitcoin was that anyone without restriction could/would be able to interact with this immutable and correct database. That’s what freedom is — its a set of behaviors and actions that no one can stop you from taking.

We can win a major battle in the arms race and gain a new territory of freedom for several years. It’s very attractive to the libertarian viewpoint if we can explain it properly. I’m better with code than with words though.” — Satoshi Nakamoto

Seeing decentralized protocols call into question the immutability of permissionless participation is disheartening → it is a hill I will die on. If as an industry we give way to regulations that harm the ability of people from around the world to access an open and fair global finanical system, then we will have collectively failed to stand for users. The foundation of everything that we do in this domain hinges upon empowering users via the equitably of open source code and the properties it can fairly empower.

On Stablecoins & Custodianship

Circle CEO Jeremy Allaire is one of the members of CENTRE’s board of managers, which votes to approve requests to blacklist USDC addresses. (Circle)

The freezing of USDC balances calls into the limelight the importance of decentralized stablecoins. Simply put, if someone else has the ability to take custody of your underlying funds, then you run the risk of losing access to representations of your time and labor. Custodianship and freedom are intimately intertwined.

And yet, Web3 has often chosen the path of liquidity over attributes. Institutional participation over ethos participation. For awhile this has worked, but only because the attributes of permisionless participation had not yet been violated in a significant way. But now, we stand at a crossroads.

What stablecoin will users choose? Will they choose stablecoins with the greatest amount of utility (USDC) or the best attributes (SILK, IST)? While my gut says utility, I can’t help but feel the majority of entrepreneurs and early stage adopters of blockchain understand the value of attributes over utility. If enough folks push for this, than we have a shot of solidifying a long term cultural stance in our industry.

And if we don’t? Then centralized stablecoins will slowly but surely dominate the entire space. Truly decentralized protocols will merely be outcasts with less adoption and utility. The utility gap between centralized and decentralized stablecoins will grow to an almost unbearable point.

But fortunately, this battle has not yet been lost or won. We are living in a unique moment in history where the battle for the hearts and minds of users and builders stands in a delicate balance.

That is why I firmly believe stablecoins such as SILK are the future. SILK has the following attributes:

  • Private
  • Permisionless
  • Fast
  • Decentralized peg
  • Decentralized collateral
  • Global
  • Stable
  • Auditable (via user choice)

The stablecoin of the future will be decentralized, but only if consumers choose it.

Dollarization of Web3

The final disturbing trend with Tornado Cash & USDC is a continued trend towards the dollarization of Web3. The more the dollar is adopted in Web3 protocols, the more influence and leverage the traditional power structures have on the future of Web3. Listed below are USDC, USDT, DAI, & FRAX. Even the decentralized stablecoins of Web3 (with respect to custodianship) are still pegged to the dollar, and by extension are inheriting the centralization of the respective monetary policy.

In order for Web3 to achieve a safe amount of decoupling from any single sovereign nation, there needs to be an intentional movement among consumers and stablecoins towards decentralized pegs that are not tied to a single sovereign currency. Stablecoins such as Nuon, SILK, and FPI are all innovating on this front.

We have the opportunity to create better currencies. Instead, Web3 is trending towards simply recreating existing financial power structures within a “decentralized” context.

May we aspire to the highest attributes. Lest we violate the integrity of the technology and what it can unlock for users around the world.

About Carter Woetzel

Carter Woetzel

I’m the lead researcher and economist for Shade Protocol — an array of connected privacy-preserving DeFi applications built on Secret Network. The flagship product of Shade Protocol is SILK: a privacy-preserving stablecoin pegged to a basket of global currencies and commodities. Be sure to follow me on twitter, and if you are interested be sure to check out my book.



Carter Woetzel

Author of “Building Confidence in Blockchain — Investing In Cryptocurrency and a Decentralized Future”