Market Review August 2022: The Tornado Cash Sanctions Fallout

Welcome to our market review for August, where we recap the biggest developments in the past month, provide some snapshots of the cryptocurrency markets and assess the fallout of the Tornado Cash sanctions.


  • News Recap

  • Markets Snapshot

  • The Tornado Cash Sanctions Fallout: What Next for Privacy on Ethereum?

  • Upcoming Events

News Recap

  • Jerome Powell’s Jack Hole speech warns of “pain” ahead

    • Slow economic growth and possibly rising unemployment ahead for Americans as the Federal Reserve continues raising interest rates to fight rampant inflation. Powell said the Fed will raise rates as high as needed to restrict growth, and would remain high "for some time" to combat growing inflation.
  • Coinbase launches liquid staking with cbETH

    • Ahead of the Merge, Coinbase introduces its own liquid staking derivative cbETH. Coinbase currently has a 14.5% market share for Beacon chain deposits, second behind Lido with a 30.37% market share.
  • US Treasury Sanctions Tornado Cash

    • On August 8th, the OFAC and US Treasury sanctioned Tornado Cash, on grounds that it was used to obfuscate funds stolen by the North Korean hacking collective, the Lazarus group. Later on in the month, Tornado developer Alexey Pertsev was arrested by Dutch authorities.
  • Optimism sees Highest Ever Monthly Transaction Count

    • In August, there were 4.3 million transactions on the Optimism network, the highest monthly figure in the rollup’s history.
  • Compound III Launches

    • A new and streamlined version of Compound was launched at the end of August, moving away from a pooled-risk model to a siloed model, where each deployment of Compound III features a single borrowable asset. The first deployment of Compound III allows you to borrow USDC using ETH, WBTC, LINK, UNI, and COMP as collateral. While interest cannot be earned on collateral anymore (except the base asset USDC), users will be able to borrow more with less risk of liquidation.
  • Maker Founder Rune Christensen calls for stablecoin float

    • Following the Tornado Cash fallout, Maker’s founder proposed reducing exposure to real-world assets and to freely float DAI against the US Dollar. The rationale behind this move is to prepare MakerDAO for any further crackdowns on DeFi projects. Christensen’s Endgame Plan v3 post goes into more detail and is a highly recommended read.
  • Frax Finance launches FRAXlend, a lending and borrowing market

    • Fraxlend will allow new FRAX to be minted and directly lent out to earn a yield in money markets. The additional cash flow can be used to buy back and burn the FXS governance token. The launch of Frax’s own lending and borrowing market follows on from the release of fxsETH, a staking derivative launched to compete with Lido’s stETH.
  • Royalty-Free Sudoswap Is Finding Favor With NFT Traders

    • Sudoswap’s sudoAMM allows anyone to become a liquidity provider for NFTs to earn fee income, utilizing an Automated Market Maker (AMM) model like Uniswap and Perp. The AMM for NFT trading saw a large uptick in trading volume over August, crossing the $10 million mark in early August, outpacing even Coinbase’s NFT marketplace. Check out this explainer to learn more about Sudoswap.
  • Silo is live in beta mainnet

    • Silo launched its innovative lending protocol in beta mainnet. Read more about Silo Finance on our blog!

Markets Snapshot

The snapshot for markets on Perp v2 over August 10th to September 9th is displayed below:

Source: Santiment; As of September 9th (11:30 UTC).Active address data unavailable for those with “-”.
Source: Santiment; As of September 9th (11:30 UTC).Active address data unavailable for those with “-”.
  • Most markets on Perp v2 have been in the red over the past 30 days, apart from Cosmos’ ATOM, which experienced price gains of almost 14%, with very slight gains for ETH and MATIC. The biggest losers over this period were PERP (-33.94%), FTM (-29.84%), and AVAX (-28.12%).

  • For trading volumes, the biggest gainers were ATOM (224.70%), BTC (+81.41%), ETH (+29.58%). The only other two assets that have seen volume growth are SOL and LINK. The largest declines in trading volume were seen for FLOW (-56.74%), FTM (-54.50%), and ONE (-51.06%).

  • A sea of red for daily active address growth is also shown by the table below with two exceptions: BTC and SAND posted positive growth in active addresses despite the broader market downturn, rising 3.62% and 14.72% respectively. The largest drops in daily active addresses were seen for APE (-43.26%), MATIC (-38.29%) and FTM (-37.10%).

  • Similarly to trading volume, social volume over the past 30 days also dropped for the majority of the market available on Perp v2. The only assets that saw rising social volume over this period were SAND, which grew a whopping 1,443.17%, BNB (+25.20%) and ETH (+18.46%). CRV, ATOM, and AVAX saw the largest declines in social volume.

Looking at the wider market, the top 15 crypto-assets by volume growth and social volume growth between August 9th and September 8th are both shown below:

  • LUNC saw a massive gain in volume, along with the price, over August with an upgrade re-enabling staking.

  • Demand for Lido’s staked ETH (stETH) token is rising as the Merge approaches.

  • There’s been more hype around fan tokens as the season gets underway for major European football leagues and the upcoming Champions League competition starting in September, benefitting Chiliz’s CHZ token (up +37.1% over the past 30 days. CHZ also has a smaller drawdown over the past year compared to BTC and ETH).

  • As another Merge play, ETC saw robust growth in trading volumes over August.

  • SAND saw the greatest jump in social volumes over the past 30 days out of all major crypto-assets on the back of several partnerships, such as Renault, and the launch of its Alpha Season 3.

  • Optimism ecosystem tokens also saw large gains in social mentions over the course of August, with USDT, DAI, USDC, LINK and SNX enjoying a high growth rate in social mentions.

  • MKR created a social buzz with the details about plans to move away from being pegged to the US Dollar following the Tornado Cash fallout.

  • YFI has also caught a social buzz with the upcoming launch of veYFI, which is very close to launching if you have paid attention to the project’s GitHub commits.

  • Another notable gainer in the social volume is RVN, a GPU mineable coin that’s become a recent favorite amongst traders. Ravencoin is one of contender blockchains (the other being Ethereum Classic) for welcoming Ethereum miners once Proof of Work is switched off later this month with the upcoming Merge.

Interestingly, the Market Value to Realized Value (MVRV) for BTC and ETH have diverged with BTC’s MVRV going back below 1 (suggesting a new bottom is forming), while ETH has remained above 1 (except for one day in August) and looks to continue higher.

The divergence suggests that ETH has already bottomed out, providing it doesn’t break back below the lower threshold of 1. However, a clear bottom will be marked out once BTC can break back above this threshold.

The Tornado Cash Sanctions Fallout: What’s Next for Privacy on Ethereum?

Not too long ago, Tornado Cash was one of the top protocols by revenue as measured by Token Terminal. Holders of the TORN token could lock their tokens into the governance contract to receive a share of the fees generated by the mixer.

Check out this guide by Coin Center on how Tornado Cash works to learn more!

But with the negative news about Tornado Cash being sanctioned by the US Treasury, the token price has fallen 57.5% over the past 30 days (although it has recently experienced a slightly bullish surge) and a massive exodus is taking place.

Source: Dune Analytics

The sanctions have provided us with an interesting natural experiment: while the sanctions have discouraged normal, law-abiding citizens from using Tornado, the remaining users are, most probably, criminal elements. The number of ETH in the pools has fallen over 50% and the number of unique weekly users has fallen from 775 at the start of August to just 44 at present.

Source: Dune Analytics

But it’s not just Tornado Cash users that have been impacted, with the fallout made even worse by the lack of privacy at the protocol level for Ethereum. Because of the transparency of the blockchain, it opens up users to dusting attacks, which occurred shortly after the sanctions were made public. Tainted ETH from Tornado has been sent to hundreds of high-profile users and even some US-based celebrities.

As a result of the Tornado REKTage, Centre froze the USDC held by any associated addresses, underscoring the need for a truly decentralized stablecoin that is unchained from centralized entities. Any addresses that have interacted with the protocol are now on the Specially Designated Nationals and Blocked Persons, meaning the owners of these addresses (if they’re doxxed) have been blacklisted from doing any business with Americans or within the States.

The cryptocurrency community has rallied against what has perceived to be an attack on privacy and code as free speech in various ways:

  • By hosting the front end of Tornado Cash on IPFS.

  • By mounting a legal challenge to reverse the decision by the US Treasury (see here and here).

  • A short-term fix to address the infrastructure level shortcomings, known as Pineapple, was introduced to block the requests and allow unimpeded access to dapps.

  • While the smart contracts of dApps are decentralized and permissionless, the front ends are not, leading to some users being blocked because of association with Tornado. A workaround is to run DeFi apps locally, as outlined here.

  • Aztec, a Layer 2 privacy solution utilizing zk-SNARKs, is an alternative to Tornado, but there have been reports it is being prohibited by the centralized exchange FTX and doesn’t get around the problem of transparency at the base layer. To learn more, check out the guide Bankless wrote on how to use Aztec.

Adding privacy at the protocol level is a one possible response to prevent the same kind of state-level attack on Ethereum and its ecosystem. Implementing zk-SNARKs on Ethereum is one avenue, but even Vitalik Buterin himself says that this technology is not mature yet, so it is not even being considered in the near future. What about zk-STARKs? While trustless, the problem is that it requires a lot of space, (i.e., a lot of data for proofs), and given blockchains are space constrained, this is a major impediment.

But what if Ethereum could outsource privacy to a well-known, battle-tested blockchain that is completely private at the protocol level?

This is exactly what Elizabethereum (aka noot) from ChainSafe is currently working on, specifically, an implementation for ETH-XMR atomic swaps. A detailed breakdown of these atomic swaps can be found here. While it is currently in the MVP stage and can be used as is, there are a few more features that need to make it production ready.

Donations are being sought to fund the project. Eventually, we could see the atomic swap contract facilitate privacy-preserving swaps between XMR and any ERC-20 via an integration with DEXs like Uniswap and Sushiswap.

Upcoming Events

  • September 13: US Consumer Price Index data release (12:30 UTC)

    • Lower than expected inflation readings could spark a rally in risk assets like BTC and ETH. On target or higher than anticipated inflation is likely to be bearish for risk assets.
  • September 13: Voyager Digital Asset Auction (14:00 UTC)

  • September 15: Expected date of the Merge for Ethereum (ETH)

  • September 21: Federal Reserve Interest Rate decision (18:00 UTC)

    • A 75 basis point hike in the base interest rate is on the table.
  • September 21: FOMC Press Conference (18:30 UTC)

    • Investors will be looking for clues in Powell’s press conference speech on the path forward for the Fed as well as remarks about September’s inflation data release.
  • September 22: Cardano (ADA) Vasil hard fork

  • September 28: US Gross Domestic Product Annualized data release (12:30 UTC)

  • September 26-28: Cosmoverse event:

    • ATOM 2.0, including upgraded tokenomics, will be revealed.
  • September 29: Results of Voyager Digital Asset Auction

  • September 2022: Launch of Curve Finance’s (CRV) stablecoin

We want to hear your feedback and also hear what future topics you’d like to see in our monthly report. Contact us via Discord or Twitter.

Disclaimer: the contents of this report should not be taken as financial advice and is provided purely as market commentary. The information provided in this report is not intended to form the basis for making investment decisions and is presented here for educational purposes only. Please do your own research before participating in the crypto market, seek independent advice on crypto-assets and ensure you are aware of the risks involved.

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