It came to light yesterday that CENTRE (the organization that created and manages USDC) had blacklisted an address holding USDC for the first time. For those who don’t know, CENTRE has the ability to blacklist Ethereum wallet addresses in the USDC smart contract which effectively freezes whatever USDC that wallet has. This news had a curious effect on USDC leading to a loss of its peg against other stablecoins like USDT for about 2 hours (as seen by the 2 large candles in the chart below).
This blacklisting actually happened back on June 16th and you can view the transaction that triggered the blacklist here. A Circle representative, speaking on behalf of CENTRE, confirmed to The Block that they had indeed blacklisted this address in response to a request from law enforcement.
This whole event got me thinking - how risky is it to continue to use and promote these centralized assets within the Ethereum DeFi space? This debate has been raging on for quite some time and was particularly heated when Maker added USDC as collateral to restore the DAI peg. Could all of this USDC backing DAI be frozen arbitrarily by CENTRE? Of course it could - and that’s one of the main worries.
Though it is worth noting that Maker in particular has certain parameters that it assigns to each collateral asset based on how risky it is. At time of writing, the maximum amount of DAI that can be generated from USDC-A is 40 million and it also has a stability fee (the fee that Vault creators pay per year) of 4%. For context, the maximum amount of DAI that can be generated from ETH is 160 million and it has a 0% stability fee - this is because ETH is a much less risky collateral asset compared to USDC.
USDC isn’t the only token on Ethereum where the central operators hold the power to blacklist accounts. For example, 39 Ethereum addresses have already been banned from using USDT. You can pretty much assume that most tokenized assets that are centralized will have a blacklist function as governments and regulators will require it before giving these projects the “green light”.
Besides Maker, other DeFi apps have also been embracing centralized assets as collateral for their platforms lately - hell, Compound basically bootstrapped their liquidity mining program by using USDT. It’s also not just centralized stablecoins that are being added to DeFi apps - tokenized representations of BTC such as WBTC are also seeing tremendous growth despite being totally centralized.
It seems like, in general, most people really don’t mind if an asset is centralized. The most important factor that people consider when using these assets is if they’re liquid and as a result, because liquidity begets liquidity, these centralized assets end up growing very fast. That’s one of the reasons why the free float DAI supply on Ethereum is only 110 million while the total USDT supply is over 6 billion. Unfortunately, I don’t see this trend ending any time soon but I do expect decentralized assets on Ethereum to gain market share over time.
In the end, I’m personally mostly interested in using and holding the only fully decentralized, permissionless, censorship-resistant asset on Ethereum.
And that asset is ETH.
Have a great day everyone,
All information presented above is for educational purposes only and should not be taken as investment advice.
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