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Transaction Censorship Debacle Draws Mixed Reactions Among Ethereum Users

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Ethereum's native token Ether traced a massive downturn towards the end of last week, giving away a huge chunk of gains recorded earlier this month. The token saw a steady price upswing in the first two weeks of the month, peaking just above $2,000 on Aug 14 before retreating towards $1,600. Market analysts attributed the significant price rally to one major driving factor – the hype around the network regarding the upcoming Merge scheduled for Sept 15.

Though ETH is back on an ascending path above 1,650 at writing (Aug 23), the excitement around the anticipated transition to PoS appears to have cooled off. This is partly due to uninspiring performance across the entire crypto market this week and a shift of focus to the controversial subject of transaction censorship on Ethereum.

The transaction censorship on Ethereum

The US Treasury Department's Office of Foreign Assets Control (OFAC) decision to sanction Ethereum coin mixer Tornado Cash almost a fortnight ago has triggered different reactions from the affected parties over the past few days. Following the blacklisting on Aug 8, a number of crypto entities, including Avalanche and USDC issuer Circle, took action against addresses linked to the mixer.

The sanction also sparked debates among cryptocurrency enthusiasts, especially within the Ethereum community, on the reach of centralized authorities such as governments on crypto entities that ‘ideally' define themselves as decentralized. The varying opinions floated around these issues introduced negative sentiment, which analysts identified as contributing to the slump that dragged down Ether at the end of last week.

The big players won't bulge, or so they say

With the expectation that up to 66% of validators on Ethereum Beacon Chain's (PoS chain) stakers would likely comply with the OFAC regulations, the Ethereum community remains divided on the right path forward. So far, the likes of Lido Finance, Kraken, and Coinbase have been mentioned.

Coinbase CEO Brian Armstrong, in a tweet response, played down the possibility of compliance, suggesting that the crypto exchange would rather close down its staking business rather than comply with the regulations to enact on-chain censorship. Nothing was conclusive as he said legal recourse could also be another option. His response nonetheless calmed concerns that crypto exchanges such as Coinbase may choose to implement censorship at the protocol level rather than block the banned transactions individually.

Buterin advocates against censorship

The concern over the fate of the network were Ethereum validators to comply with the directive of the OFAC led to the creation of a Twitter poll on the subject last week. Working with the possibility that stakers choose to censor at the protocol level, the poll questioned whether to “consider the censorship an attack on Ethereum and burn their stake via social consensus” or “tolerate the censorship.” Buterin, in his response to the Twitter poll, sided with the majority (61.2%) to consider burning the stake of these entities.

Disagreement on how to deal with transaction censorship

The debate around Tornado Cash sanctioning and what it means to the crypto space became even more intense over the weekend after pseudonymous crypto analysts TakensTheorem revealed that Ethermine is no longer processing transactions from the mixer. The tweet received a lot of reactions as ETH holders pondered the potential impact and outcome if centralized validators followed in the steps of the largest Ethereum miner.

The question of transaction restriction on Ethereum has prompted two major suggestions for remedies – social slashing and a user-initiated soft fork. The former, however, comes with huge risks, notably a chain split that will result in a censorship-less chain and an OFAC-compliant chain. Cyber Capital's Justin Bons founder is among those strongly against this idea. In a series of tweets posted on Monday (Aug 22), Bons argued that this approach “represents a greater risk than the OFAC regulation” and is not a feasible solution to the censorship problem at the protocol level.

On the other hand, those favoring slashing include Anthony Sassano, who shared on Saturday that “collateral damage is inevitable.” The popular Ethereum educator added that Ethereum's credible neutrality and censorship resistance properties are worth preserving. This view is shared by Geth developer Marius Van Der Wijgen, who separately noted that allowing censorship on the Ethereum network makes no sense and would sum up as a failure.

“I think censorship resistance is the highest goal of Ethereum and of the blockchain space in general, so if we compromise on that, there's not much else to do, in my opinion,” Van Der Wijgen said during the All Core Devs call concluded last week.

Raoul Pal is ‘very bullish right now' despite the rocking boat

The recent Ethereum troubles might have fazed crypto investors but not former Goldman Sachs executive Raoul Pal. In an interview with analyst Scott Melker discussing alongside other investment figures, including SkyBridge Capital founder Anthony Scaramucci, Pal explained that everyone is still “underweight the Merge.

The macro guru expects that as Ethereum transitions into the Merge, or the days after that, it will see a spike in price, rising upwards before reverting characteristic of a sideways correction. As such, he said he's very bullish at the moment, explaining that even though ETH currently bears the risk of getting overbought, it will recover from this downturn.

Pal, the founder of Real Vision, also noted that at present, forwards and futures markets are both hedging the ETH merging risk, meaning that if one stacks up ETH tokens today and sells futures, it's likely that someone will eliminate that hedge sooner or later. This is why he says crypto exchanges (having been severely thrashed by the bear market) have been buying call options to hedge the Merge.

To learn more, visit our Investing in Ethereum guide.

Sam is a financial content specialist with a keen interest in the blockchain space. He has worked with several firms and media outlets in the Finance and Cybersecurity fields.