CMC takes a deeper dive into the world of DeFi by analyzing Tornado Cash.
This doesn’t necessarily mean that they know the personal information of a user, of course, due to the pseudonymous nature of public addresses, but it still leaves something to be desired from the more privacy-oriented crypto users.
Now, to solve this “problem” of transparent pseudonymity, various solutions and protocols developed with a privacy focus in mind, but arguably none of them have been quite as successful as the transaction mixer.
A transaction mixer essentially scrambles together the funds of multiple users as well as their transactions: before each transaction reaches its intended destination, it is “mixed.” After this mixing process occurs, it becomes a lot more difficult for anyone to trace whose money went where, and what amount.
When it came to actually putting transaction mixers into use, the protocols developed worked by sending a large number of random transactions through multiple addresses in order to increase the anonymity of transactions. However, these transactions could still be traced on the public ledger, so this was not considered a fully-successful solution.
Tornado Cash aims to solve the privacy problem of transparent blockchains through the use of private transactions. It is not exactly a coin mixer like Samourai and Wasabi, because it mixes the coins in a slightly different way — but in the end, Tornado Cash has the same goal of keeping financial transactions private.
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What Is Tornado Cash (TORN)?
Once you send an ETH or ERC-20 deposit to Tornado Cash, you can withdraw your crypto through a new address. Once the asset is withdrawn by the new address, there’s no way to link the withdrawal to the deposit and this, in turn, ensures asset privacy.
The TORN token is an ERC-20 token with a fixed supply that allows for holders to make proposals and vote for changes within the protocol. Users of Tornado Cash accrue Anonymity Points as they interact with the protocol, which are then deposited into a shielded account. When they collect enough Anonymity Points, they can convert them into TORN tokens in a similarly protected process.
How Does Tornado Cash Work?
If you are interested in using Tornado Cash, here’s how it works. You need to deposit funds to Tornado Cash, after which it will generate a random key and deposit your ERC-20 tokens. To make a withdrawal at some point in the future, you will need to submit proof of having the valid key.
Start by making a deposit, and choosing an ERC-20 token as well as the amount to deposit. Click on “Deposit” and confirm.
You can withdraw by using either a crypto wallet like MetaMask or via Relayer. If you choose to use a wallet, make sure that you generate a new address in order to continue to protect your privacy. Another way is to use Relayer, which avoids any possibility of recording the transaction publicly attached to you on the blockchain; once you generate a new Ethereum address, Relayer will deposit your funds, and charge you a network fee in ETH.
When you’ve decided how you want to withdraw your funds, enter your deposit’s secret and click on the “Settings” menu there. Here, you’ll choose a wallet option, and save it. Then you have to just enter your address and click on “Withdrawal.”
What Makes Tornado Cash Unique?
Tornado Cash essentially improves the privacy of transactions by breaking the on-chain link between a source and a destination address. Tornado Cash also uses smart contracts that accept ETH deposits, which can then be withdrawn by a variety of different addresses. And, as mentioned above, to prevent privacy, the Relayer can be used to withdraw to an address without an ETH balance as well.
With this zero-knowledge proofs protocol, there are two parties involved.
- The Prover – who seeks to prove a hypothesis.
- The Verifier - who determines the veracity of the prover’s claims.
When a user deposits ETH to the Tornado smart contract, they generate a secret and send a hash (called a commitment) along with the deposit amount into the smart contract.
The smart contract adds the funds to its list of deposits, and when the user wants to make a withdrawal, the user has to provide the corresponding secret that matches the unspent deposit from the Tornado Cash deposit list.