Ethereum(ETH) co-founder Vitalik Buterin; core developer Ameen Soleimani; Jacob Illum of Chainalysis; and scholars Matthias Nadler and Fabian Schar have co-authored a research paper on a novel privacy protocol dubbed “Privacy Pools.”
The paper presents a framework, positioning it as a potential successor to Tornado Cash, a privacy-centric service that recently came under regulatory scrutiny.
Privacy Pools is a “smart contract-based privacy-enhancing protocol” designed to balance financial privacy and regulatory compliance.
Using advanced cryptographic techniques like zero-knowledge proofs, the protocol verifies the legitimacy of user funds without revealing their complete transaction history.
The crux of Privacy Pools rests on establishing a “separating equilibrium”—a term coined by the authors to describe a system that filters out illicit funds while maintaining compliance with regulatory standards.
It enables private and legal financial transactions, which has been a difficult task in the blockchain field. Simply put, the protocol lets users prove the legality of their funds without revealing their entire financial transaction history.
The authors also provided a contextual backdrop by mentioning Tornado Cash, a previous player in the blockchain privacy arena.
Although useful for privacy-oriented transactions, Tornado Cash became embroiled in a legal debacle for allegedly facilitating transactions connected to the North Korea-affiliated hacking group, Lazarus.
As of August 2022, it had been blacklisted by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), highlighting the need for a more balanced approach to privacy and regulation.
The introduction of Privacy Pools aims to transform blockchain-based financial transactions.
The authors suggest that combining privacy and regulation could be advantageous for crypto’s long-term sustainability.
If Privacy Pools work well, they might provide a framework for financial privacy that also complies with regulations.