Privacy Pools - Private and Compliant

Key Insights

• Blockchains, while offering trustless validation of transactions due to their transparency, sacrifice user privacy. As blockchain addresses increasingly link to real-world identities, this lack of privacy heightens the risk of targeted attacks.
• Tornado Cash, a prominent decentralized privacy application on Ethereum, saw its use decline after the U.S. Office of Foreign Assets Control sanctioned it. Users interacting with Tornado Cash risked being flagged, making them wary of using the service.
• Privacy Pools, a new protocol under testing, aims to give users the option to maintain privacy without being associated with illicit activities. Users can prove that their funds come from specific subsets of deposits, allowing them to avoid subsets with known illicit activities.
• Building upon the designs of mixers like Tornado Cash, Privacy Pools adds a second proof that ensures that the user's funds belong to a specific subset of deposits. These subsets can be curated by various entities, offering flexibility based on user needs and regulatory environments.
• Privacy Pools offers a promising solution to the ongoing tension between blockchain transparency and user privacy. By allowing users to prove the legitimacy of their funds without compromising their privacy entirely, it potentially sets a new standard for blockchain-based privacy tech.