More Than Half of Ethereum Network is Excluding U.S.-Sanctioned Wallets

Just two months after the U.S. Treasury Department sanctioned Tornado Cash, more than half of the blocks on the Ethereum network appear to be excluding transactions from the sanctioned wallets, according to data from MEV Watch.

Martin Koppelmann, the co-founder of Gnosis, described the statistic as a “sad milestone in censorship” for the network. “This means if the censoring validators would now stop attesting to non-censoring blocks they would eventually form the canonical, 100% censoring chain,” Koppelmann tweeted on Oct. 14.

Percentage of Ethereum blocks complying with U.S. Treasury sanctions over 24 hours. Source: MEV Watch

Yet other Ethereum proponents argue that Proof of Stake block production is more complicated and censorship-resistant than MEV Watch’s data suggests.

Basile Sportif, the founder of Uqbar network, argued that concerns regarding a possible chain-split are unfounded. He noted that validators complying with U.S. sanctions continue to build on top of previous blocks containing transactions from the blacklisted wallets.

Shockwaves

“Forty-eight percent of validators will include your Tornado tx, and all the rest will build on those blocks,” he said. “Your dirty tx is going to get in just fine.”

On Aug. 8, wallet addresses associated with Tornado Cash, a crypto mixing service, were added to the Office of Foreign Assets Control’s Specially Designated Nationals List, making it illegal for U.S. persons and entities to interact with them.

The move sent shockwaves across the crypto industry, with major DeFi protocols including Aave, Uniswap, dYdX, and Balancer blocking the sanctioned addresses from accessing their dApps from their main front-end interfaces. Centre, the consortium behind the centralized USD Coin stablecoin, blacklisted 38 wallets holding 75,000 USDC in response.

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Flashbots, the leading team researching Maximal Extractable Value, also confirmed they would comply with the sanctions on Aug. 17.

MEV is an opaque arbitrage strategy used by block producers and validators to extract profits from decentralized blockchains by reordering on-chain transactions. Flashbots provides tools and software that reduce the barriers to participating in MEV extraction and share the profits gleaned through MEV across Ethereum’s validator ecosystem.

Flashbots estimates that ordinary Ethereum users lost $240M to MEV bots over the past 12 months.

Greater Rewards

Flashbots developed its MEV-Boost software for the post-merge Ethereum landscape, promising that Proof-of-Stake validators running the software would enjoy greater rewards by participating in MEV. On Sept. 20, Hasu, Flashbots’ strategy lead, shared data indicating that validators running MEV-Boost are earning 135% more than validators not using the software.

With such juicy yields on offer, it is unsurprising that 58% of validators are using MEV-Boost despite the software complying with the Treasury Department’s sanctions.

Overblown

Koppelmann called on Flashbots to take action to reduce the growing censorship on the Ethereum network. “Dear Flashbots team – I spoke to many of you personally and you committed to take actions if censorship becomes worse – but if not now, when then?” he tweeted.

However, Sportif posted that the concerns surrounding Ethereum censorship are overblown.

Sportif argued that validators refusing to build on top of validated blocks containing transactions from sanctioned wallets are a far greater censorship risk than block builders excluding transactions.

Sportif said validators running MEV-Boost are continuing to build on top of past blocks containing transactions from sanctioned wallets, which eliminates the censorship threat.

“Validators are excluding some transactions when creating their own blocks, but building on prior valid blocks as normal,” he said. “This presents ~zero censorship risk.”

Sportif added that validators running MEV-Boost can also opt to use a different transaction relayer, noting that transactions from sanctioned addresses are only censored if validators utilize Flashbots’ default relayer.

Multiple Relays

“Any validator who cares at all about censorship will be aware of this, and will not use that relayer (or will not use MEV-Boost),” they said.

Mkkoll, an Ethereum validator, chimed in, stating “I am concerned about censorship on Ethereum… As a validator, I choose not to run MEV-Boost.”

Twitter user JoeOfTheWalley also said he is boycotting MEV-Boost. “That’s why I stopped using Flashbots,” he tweeted. “Yes, it is less profitable. But we need to make a stand.”

Flashbots open-sourced the code for its relay the day after it confirmed it would comply with the Treasury Department’s sanctions in August.

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“Multiple relays at the merge — rather than a single default — is key to Ethereum’s health,” Hasu said at the time. “We are open-sourcing our relay to encourage competition and reduce single points of failure.”

Hasu responded to the censorship concerns on social media, placing the blame for the high percentage of OFAC-compliant blocks on inaction from the Ethereum community. “It’s a failure of the Ethereum ecosystem that one month after The Merge, there is still no neutral relay,” he said.

Block Value

Twitter user CometShock responded to Hasu, questioning what incentives exist for developers to create an independent and neutral relayer. Flashbots’ Bert Miller replied that a developer could charge builders for submitting blocks to their relayer, or alternatively take a percentage cut of the block’s value.

But Julian Villella, a software engineer, retorted that builders would be unlikely to pay for a relayer while Flashbots offers a relay service for free. “I could only see this working if there was product differentiation, e.g. the relay provides some features that builders would be willing to pay for,” he said.