Tethered to Reality - The Daily Gwei #70
Tethered to Reality - The Daily Gwei #70
Centralized assets on Ethereum can sometimes be a good thing.
Yesterday someone accidentally sent 1 million USDT to the Swerve token contract which meant that it was lost forever - or was it? Shortly after this event was made public, Paolo Ardoino (CTO of Bitfinex and Tether) tweeted out that the affected person could contact Tether support to possibly have the transaction reversed. Paolo’s tweet shows both the benefits and drawbacks of these centralized assets.
Now, reversing a transaction on a decentralized blockchain is not usually possible unless you’re able to gain majority hashpower (or stake) over the network. The reason why it’s possible with Tether (and some other ERC20’s on Ethereum) is because the owners of these tokens are able to basically program in admin control or backdoors at time of creation. Because of this, the Tether team can do things like reversing a USDT transaction to help an end-user out. Though the flip-side to this is that they can also arbitrarily freeze USDT located anywhere on Ethereum (in a users wallet, in a smart contract, in an exchange etc).
This got me thinking - are these centralization points something to be celebrated? I actually think the answer is yes because if you’re using a centralized asset such as USDT or USDC, you should get some level of protection in return. Put another way, if you’re taking on the risks of using a centralized asset on Ethereum, then you should also get the benefits. These risks are very real too - just a couple of months ago CENTRE (the organization that manages USDC), blacklisted an address holding USDC for the first time. I wrote about that here if you’d like to read more.
Other assets such as WBTC (wrapped Bitcoin) are in the same boat here. For example, if you were able to prove that you lost access to your WBTC (by accidentally sending it to a token contract), then I’m sure the centralized issuers would just issue you some fresh WBTC and mark-off the stuck/lost WBTC (because the actual BTC is held in a multi-sig wallet managed by BitGo which means the BTC actually wasn’t lost - just the IOU WBTC token). This is a clear benefit to holding a centralized asset that a decentralized one (such as ETH) can never offer natively. There are of course ways to prevent people sending assets to an address where they’d be lost (such as building various mechanisms into wallets to warn about the transaction).
So as you can see, there are various benefits to these centralized assets if you’re happy accepting the trade-offs of them being, well, centralized. I’ve said it before and I’ll say it again, I always prefer using decentralized assets on Ethereum - whether that is ETH or a stablecoin like DAI. Though, this does come with trade-offs as DAI tends to be less stable than its centralized counterparts and there’s no built in protection in case of user error.
Have a great day everyone,
Anthony Sassano
All information presented above is for educational purposes only and should not be taken as investment advice.