Discover strategies for tracing Tornado Cash transactions in our comprehensive guide for blockchain forensic investigators.

My previous article explored essential Python techniques for monitoring Tornado Cash-funded activities, highlighting the importance of vigilant blockchain security in today’s digital landscape. Continuing that discussion, this follow-up article delves deeper into Tornado Cash, a subject of increasing relevance for blockchain forensic investigators. The sanction by the U.S. government has kept its use in illicit activities, making an in-depth understanding of its mechanisms crucial for those in the field.

Tornado Cash, an Ethereum-based virtual currency mixer, plays a significant role in concealing the origins and destinations of cryptocurrency transactions. Despite its controversial nature, this decentralized platform provides vital learning opportunities for forensic experts. In this article, I will explore the complexities of Tornado Cash’s operational mechanics and shed light on strategies to effectively track its transactions, building on the foundational knowledge established in our previous discussion.

Tornado Cash operates on the Ethereum blockchain, leveraging smart contracts to enhance transaction privacy significantly. Its core function is to disrupt the traceable link between the source and destination of funds within the blockchain. To gain a more comprehensive understanding and a visual appreciation of Tornado Cash’s functionalities, I highly recommend watching the “How to Use Tornado Cash | DeFi + Zero Knowledge Proof” video on YouTube by Smart Contract Programmer, which provides a detailed 5-minute overview.

How to Use Tornado Cash | DeFi + Zero Knowledge Proof by Smart Contract Programmer.

Simply put, the process of Tornado Cash can be broken down into the following steps:

• Deposits: Users start by depositing Ethereum or other supported tokens into Tornado Cash’s smart contracts. These deposits are set at fixed amounts to maintain uniformity, a critical factor in ensuring adequate anonymization.

• Anonymization Process: The tokens are mixed with others in the pool after depositing. This mixing process obscures the link between the input (the deposit) and output (the withdrawal), thereby anonymizing the transaction.

• Withdrawals: For withdrawal, users generate a cryptographic proof of their deposit. This proof is designed to be non-specific, meaning it doesn’t reveal which exact deposit belongs to the user. Submitting this proof to the smart contract enables users to withdraw their tokens to a new, unrelated address.

*The GitHub repository titled ‘List of Tornado Cash Contracts on Ethereum’ is particularly handy for a straightforward reference to Tornado Cash’s infrastructure. This repository serves as a quick-access guide, listing all relevant Tornado Cash contract addresses deployed on the Ethereum network. *

Tracing transactions within Tornado Cash is hindered by several inherent features:

• Uniform Deposits: Tornado Cash’s fixed deposit sizes make individual transactions hard to distinguish, complicating specific transaction tracing.

• Cryptographic Anonymity: Utilizing zero-knowledge proofs, Tornado Cash hides depositor identities during withdrawals, obscuring the origin of funds.

• Decentralized Nature: Its DAO governance and non-custodial approach complicate regulatory oversight and control.

Additionally, broader ecosystem challenges include:

• Sanctions Compliance: OFAC’s listing of Tornado Cash addresses brings enforcement and compliance difficulties, mainly due to its decentralized protocol.

• Vulnerability to ‘Dusting Attacks’: The blockchain’s nature exposes users to small, potentially problematic transactions, complicating compliance.

• Stablecoin Issuers’ Dilemma: Responses to sanctions vary among issuers like Circle and Tether, reflecting differing views on their compliance obligations, further complicating transaction monitoring and regulation.

Investigators can employ specific strategies to effectively track transactions despite the challenges posed by Tornado Cash’s anonymization features.

• Instant Deposit/Withdrawal to Same or Related Addresses: This method involves correlating multiple deposits and immediate withdrawals to the same or related addresses. For instance, imagine an individual sending a total of 500 ETH to Tornado Cash, spread across five transactions of 100 ETH each. By closely monitoring the withdrawal transactions from Tornado Cash during the corresponding period, investigators could potentially identify a pattern where five different addresses each receive 100 ETH. Suppose the sum of withdrawals to these addresses matches the initial deposit amount. In that case, it suggests a correlation between the deposits and withdrawals, indicating the same entity controlling both sets of transactions.

• Withdrawal Over Time to Same or Related Addresses: This involves tracking withdrawals that cumulatively match the deposited amount over time. For instance, investigators actively monitor a scenario where an individual deposits 400 ETH in four transactions of 100 ETH each, observing for withdrawals of the same total amount (400 ETH) to a single or related address over time.

• Common Spend Heuristic: This heuristic assumes that mixed coins will likely be deposited into an exchange address, allowing tracking of common-spend mixers as a post-mix analysis technique.

• Chronological Analysis: Unlike coinjoins, Tornado Cash operates on a FIFO (First-In-First-Out) basis with some randomness. Analyzing the start and stop conditions of mixing can reduce the number of possible permutations, aiding in post-mix analysis.

It’s important to note that these methods are not deterministic and may yield false positives. They rely heavily on the behavior of the users and their withdrawal patterns.

For blockchain forensic investigators, understanding the intricacies of Tornado Cash is crucial. While the mixer’s design inherently complicates tracking efforts, investigators can uncover patterns and tracers’ actions to combat illicit activities through systematic analysis and advanced tools. As cryptocurrency evolves, so must the strategies employed to ensure transparency and legal compliance in this dynamic domain.

DeFi Hack Survival Guide: Prepare Now or Pay the Price

For more blockchain, cybersecurity, and cybercrime research, visit Blockchain Insights Hub.

Follow me on Twitter to get the latest articles and updates directly in your feed. Alternatively, you can subscribe to receive alerts via email whenever I publish new content.