The historic upgrade of Ethereum in September 2022 – which marked the transition of the network from a proof-of-work (PoW) to a proof-of-stake (PoS) validation mechanism – resulted in a total reduce the blockchain compliance with the standards set by the US Office of Foreign Assets Control (OFAC).
Ethereum blocks following OFAC compliance censors some transactions, which negatively affects the neutrality of the Ethereum ecosystem. In early August 2021, OFAC approved Tornado Cash and several Ether (ETH) addresses associated with it due to its ability to mask and anonymize cryptocurrency transactions.
Prior to the Merge, Ethereum’s compliance with OFAC increased significantly as entities such as cryptocurrency exchanges chose to run MEV-Boost censorship relays on their validators. The list of top censors of transactions made on the network is populated by popular platforms such as Binance, Celsius Network, Bitfinex, Ledger Live, Huobi (HTX) and Coinbase, according to data from MEV Watch.
However, the overall compliance of Ethereum blockchains with OFAC has decreased significantly. As of November 2021, 78% of Ethereum’s total blocks are compliant with OFAC regulations. This Wednesday, September 27, Ethereum’s compliance with OFAC fell by 30%, recording a total decrease of 57%.
Countering OFAC compliance requires carriers to use relays that do not censor transactions in accordance with OFAC requirements. There are seven major MEV relays that are commonly used: Flashbots, BloXroute Max Profit, BloXroute Ethical, BloXroute Regulated, BlockNative, Manifold, and Eden. However, not all systems are OFAC compliant, according to MEV Watch:
“Of the 7 major relays available, only 3 do not censor (transactions) in accordance with OFAC compliance requirements.”
It’s also important to note that not all blocks created by OFAC-compliant relays censor transactions; however, all blocks created by OFAC-compliant relays will censor transactions if they are sent over the network and do not meet the governing body’s compliance standards.
While OFAC regulations primarily target US-based organizations, non-US validators should consider running uncensored relays for the sake of net neutrality.
Amid Ethereum’s reduced compliance with OFAC, Grayscale has made the decision to relinquish all rights to the Ethereum PoW token (ETHPoW). However, the decision was attributed to the lack of liquidity of the tokens in the market. According to the manager’s official announcement:
“As such, it is not possible to exercise the rights to acquire and sell ETHPoW tokens, and for the shareholders of the record date, Grayscale renounces the rights to these assets.”
On the other hand, some cryptocurrency investment companies like ETC Group tried to launch exchange traded products (ETPs) dedicated to EthereumPoW.
