As cryptocurrencies such as Bitcoin and Ethereum continue to gain traction, there’s an increasing demand for enhanced privacy and anonymity during transactions on public blockchains. While crypto transactions provide pseudonymity compared to conventional financial transactions, the transparent nature of most blockchains means that, given sufficient analysis, connecting transactions and wallet addresses to real identities is often feasible. The absence of comprehensive privacy raises concerns among numerous cryptocurrency users. Herein lies the importance of privacy solutions such as Tornado Cash. Tornado Cash stands as a decentralized, non-custodial privacy solution developed on Ethereum. It empowers users to engage in confidential transactions, safeguarding the anonymity of their cryptocurrency assets.

How does tornado cash work?

Tornado Cash on IPFS is a smart contract that allows Ethereum and ERC20 token holders to deposit funds into a pool and later withdraw them to a different address, breaking the on-chain link between the deposit and withdrawal transactions. It uses zero-knowledge proof technology to verify that the user withdrawing funds is the one who deposited them without revealing their identity.

• A user sends ETH or supported ERC20 tokens from their wallet to the Tornado Cash smart contract 
• The smart contract adds the deposited funds to its pool or liquidity reserve
• Later, the user initiates a withdrawal to any Ethereum address by generating a secret note and zero-knowledge proof 
• The intelligent Cash Tornado contract verifies the zero-knowledge proof and sends the withdrawn amount to the specified address
• An observer cannot tell which deposit corresponds to which withdrawal, breaking the link between sender and recipient

The beautiful part is that this happens without Tornado Cash ever taking custody of user funds. The intelligent contract mixes and matches deposits and withdrawals in its pool. Tornado Cash also never requires any user identification or KYC checks.

Benefits of tornado cash

1. Enhanced privacy and anonymity

The main benefit of using Tornado Cash is that it significantly enhances privacy and anonymity for crypto transactions. By breaking the visible on-chain link between the depositing and withdrawing addresses, Tornado Cash makes it extremely difficult for outside observers, blockchain forensics firms, or anyone else to tie a specific transaction to a real-world identity. This allows individuals to transact more freely and privately without worrying about revealing details about their crypto holdings and activity. It’s a way to maintain financial sovereignty and avoid surveillance or censorship.

2. Protection from targeted hacks and theft

Malicious actors often use blockchain analysis to identify high-value target wallets or individuals with extensive crypto holdings and then employ phishing, social engineering, SIM swapping and other techniques to steal their funds. Using Tornado Cash to sever the visible connection between past and future transactions, users can make it much harder for would-be attackers to size up and target their holdings. Withdrawing funds to a fresh wallet with no prior history is an excellent way to stay one step ahead of opportunistic criminals.

3. Compliance benefits for businesses

While often associated with illicit activity, privacy tools like Tornado Cash help businesses comply with financial regulations. For companies that want to protect their competitive advantage and keep transactional data confidential, Tornado Cash offers a way to conduct business on Ethereum without broadcasting strategically sensitive information to the whole world. Any company using Tornado Cash must keep its records and comply with all relevant laws. However, the point is that on-chain privacy does not necessarily equal non-compliance. There are legitimate business reasons to keep transactional data discreet.