The historic Ethereum upgrade in September 2022, which transitioned the network from Proof of Work (PoW) to Proof of Stake (PoS), has led to a notable decrease in compliance with the standards set by the Office of Foreign Assets Control (OFAC).
Ethereum blocks have traditionally followed OFAC compliance measures to scrutinize specific transactions, impacting the neutrality of the Ethereum ecosystem. In August 2022, OFAC sanctioned Tornado Cash and several Ethereum wallet addresses linked to it due to its capability to obfuscate and anonymize transactions.
Before the upgrade, Ethereum's OFAC compliance had been on the rise as entities like cryptocurrency exchanges chose to run audited MEV-Boost relays on their validators. Some prominent platforms that have been flagged for poor censorship compliance include Binance, Celsius Network, Bitfinex, Ledger Live, Huobi (HTX), and Coinbase, as per MEV Watch.
However, Ethereum's overall OFAC compliance has witnessed a significant decline. In November 2022, about 78% of Ethereum blocks were OFAC compliant. As of September 27, Ethereum's OFAC compliance has plummeted to 30%, marking a substantial 57% decrease.
To address OFAC compliance requirements, validators use relays that are not subject to OFAC scrutiny. There are seven main MEV boost relays in common use, including Flashbots, BloXroute Max Profit, BloXroute Ethical, BloXroute Regulated, BlockNative, Manifold, and Eden. However, MEV Watch notes that not all these systems meet OFAC compliance standards:
"Out of the seven primary relays available, only three have been assessed for OFAC compliance requirements."
It's essential to understand that not all blocks constructed by OFAC-compliant relays will censor transactions. However, when non-compliant transactions are broadcast to the network, all blocks created by OFAC-compliant relays will be subject to censorship.
While OFAC regulations primarily target U.S. entities, validators outside the U.S. are increasingly considering running non-censorship relays to ensure the network's interests are safeguarded. Grayscale recently chose to renounce all rights to its PoW Ethereum token (ETHPoW) due in part to reduced OFAC compliance in Ethereum. However, this decision was also influenced by a lack of liquidity in the market.
Conversely, some cryptocurrency investment firms, like ETC Group, have attempted to launch dedicated Ethereum PoW exchange-traded products (ETPs).
