Grim Reality of the Crypto Market
2022.12.07 10:26
The topic of cryptocurrency mixing services is contentious in the industry. While others maintain that these protocols are primarily used for illicit purposes, others support the privacy-enhancing qualities of these protocols.
The general consensus is that platforms like Tornado Cash are “guilty as charged.” In August 2022, the infamous decentralized mixing protocol was approved by the Office of Foreign Assets Control (OFAC) of the United States. This basically made it illegal for anyone to use the service.
One of Tornado Cash’s developers, Alexey Pertsev, remains controversially detained in the Netherlands as investigators attempt to build a case against the Russian developer for his alleged role in the mixer’s operation. Tornado Cash remains a contentious topic.
According to a report published by Elliptic, a blockchain analytics company, cryptocurrency mixers appear to be one man’s loss and another man’s gain.
Elliptic points out in its analysis that Tornado Cash processed cryptocurrencies worth more than $7 billion. The platform was used by state hackers from the North Korean Lazarus Group and others to launder an estimated $1.54 billion worth of illegal cryptocurrency.
The sanctions imposed by OFAC resulted in a 60% decrease in the holdings of Tornado Cash liquidity pools, reducing the platform’s anonymizing potential for large-scale money laundering operations.
Numerous alternative mixing services have been identified as potential threats to cryptocurrency service providers and criminal investigators in light of Tornado Cash’s apparent shutdown. In the wake of Tornado Cash’s ban, six distinct protocols have been utilized as mixers, according to Elliptic.
Elliptic’s report unloads how these blender conventions work in various ways and give different results to possible clients. These obfuscation protocols have mixed over $41 million worth of cryptocurrency, which pales in comparison to the total amount processed by Tornado Cash in a top-down perspective.
Due to their usefulness in decentralized finance (DeFi), the most common mixed tokens are Tether (USDT), BNB (BNB), Wrapped Ether (wETH), and Ether (ETH). Polygon-based tokens are notably absent from Elliptic’s figures.
Two specific protocols account for three-quarters of the mixed cryptocurrency and have the highest mixing capacity of the tools analyzed.
Elliptic claims that professional traders and DeFi users seeking to conceal investment strategies use Railgun, a decentralized protocol. Using zero-knowledge-proof technology, the Railgun Privacy System removes wallet addresses from transactions on public blockchains. It claims to be interchangeable and compatible with ERC-20 tokens.
The second protocol, Cyclone Protocol, is a Tornado Cash fork that promises a number of improvements, including yield farming for anonymous pool contributors. Elliptic reports that Twister can blend 100 ETH/100,000 USDT in one example and is accessible on IoTEX, Ethereum, BNB Savvy Chain and Polygon.
Beside Tornado, which Elliptic features as the most noteworthy gamble convention among the six in its report, reserves being blended by these administrations “generally reflect genuine DeFi exchanging movement.”
Only $40,000 of mixed funds could be linked to DeFi thefts, indicating that nefarious actors and criminal elements have not adopted these alternative mixing protocols.
Elliptic warns about a few of the services it highlighted despite the fact that only a small amount of cryptocurrency has been mixed by bad actors.
Following Tornado Cash sanctions, Cyclone Protocol has been identified as the service with the greatest risk. According to Elliptic, the service’s high transaction limit, abundant liquidity in its mixing pools, and capacity to process Tornado Cash’s eponymous governance token (TORN) are cause for concern:
“It’s confirmed use to launder at least some proceeds of DeFi exploits, the large amount of funds it has since processed and the apparent absence of its developer team to address concerns only strengthen these risks.”
The Buccaneer V3 (BV3) risk tool received a score of “medium-high.” Users can “bury” funds for an indefinite amount of time without having to mix, pool, or cycle transactions with the Ethereum-based token (BUCC). As an obfuscation strategy, a decoy mode displays fictitious BUCC balances on user interfaces.
Because it uses a Gas Station Network to pay transaction fees by claiming a small portion of transferred BUCC, the service may be appealing to illicit use cases. Users may be able to avoid using cryptocurrency exchanges and services that comply with regulations by using this method:
“BV3 therefore claims that it solves the ‘funding problem’ — the issue that addresses typically need to source ETH to pay transaction fees, typically from a centralized KYC exchange.”
Elliptic warns that BV3 makes use of technology that is still being tested and has features and capabilities that are not yet fully realized. Elliptic believes that the remaining four protocols contain factors that will prevent widespread illicit use.
