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A group of Stanford University blockchain researchers divided the crypto community last week with a research proposal that would entertain the possibility of creating reversible transactions on Ethereum.
The proposal was welcomed by those who believe crypto’s status quo – where theft is rampant and a typo can cost you $36 million – poses barriers to mainstream adoption. But it was panned by others for its suggestion that a “decentralized set of judges” should be used to arbitrate transaction disputes.
This article originally appeared in Valid Points, CoinDesk’s weekly newsletter breaking down Ethereum’s evolution and its impact on crypto markets. Subscribe to get it in your inbox every Wednesday.
Implicit in the proposal was a question: In an industry where the next $100 million theft is an inevitability, does protecting users require compromising on core principles?
A key tenet of blockchains like Ethereum is the concept of immutability – the idea that transactions cannot be reversed once they are finalized. Immutability is heralded as an important feature for cryptocurrencies because it curtails the ability of banks, governments and other central authorities to come in and alter a chain’s ledger.
But immutability can also be a major user-experience bummer: If you get scammed, are the victim of a hack or just screw up and send funds to the wrong address, you have zero recourse to recover your losses.
In terms of on-chain thefts, the Stanford researchers noted in their paper that “in 2020, $7.8 billion was stolen, and in 2021 that amount doubled to $14 billion.” According to these researchers, “Had there been a way to reverse the offending transaction(s) – as in traditional finance – the damage could have been greatly reduced.”
But not everyone is convinced.
A modest proposal?
Ethereum builders tend to create new tokens by writing code that follows certain predefined standards. These standards act like templates; developers can clone a token template, change a couple of parameters and build out a brand-new cryptocurrency that is automatically compatible with most mainstream Ethereum apps.
Read more: What Is the ERC-20 Token Standard?
The Stanford proposal extends the ERC-20 and ERC-721 token standards used by most Ethereum-based currencies and non-fungible tokens (NFT). The new standards, ERC-20R and ERC-721R, would allow for transactions to be wound back if they are disputed within a brief window of time.
“Within the short dispute period, a sender can request to reverse a transaction by convincing a decentralized set of judges to first freeze the disputed assets, and then later convincing them to reverse the transaction,” the researchers explained in their paper.
When one of the researchers, Kaili Wang, posted the proposal to Twitter, she set off a firestorm across Crypto Twitter.
On the critical end, it was the mention of a “decentralized set of judges” that seemed to strike a nerve with the largest number of tweeters.
Many contended that a system like the one proposed in the paper simply wouldn’t work. “Decentralized court systems using your proposed justice model already exist (e.g., Kleros) and unfortunately they are rife with corruption [...] astroturfing and manipulation by founders or early token holders,” tweeted FatMan, a pseudonymous crypto sleuth with a large following.
Others thought the involvement of human judges undermined the entire point of decentralized finance (DeFi), where code is supposed to remove the requirement that transactions be “permissioned” by central authorities.
“All comes back to whether we want permissioned or permissionless defi,” tweeted Evgeny Gaevoy, the CEO of the crypto market maker Wintermute. “In my opinion, permissioned defi is an oxymoron. Might as well get back to databases run by legacy banks.”
“Recent events haven't changed my opinion on that at all,” added Gaevoy, whose company lost $160 million to an exploit earlier this month after losing $15 million to a separate exploit back in June.
In addition to raising some technical nit-picks, Luke Youngblood, the co-founder of the decentralized finance firm Lunar Labs, framed his criticism of the proposal through a regulatory lens. “It also creates a regulatory/censorship choke point where governments and other regulators can potentially reverse crypto transactions, so it violates the censorship resistance and immutability that blockchains offer,” he said in a message to CoinDesk.
Setting the record straight
The researchers noted in email correspondence with CoinDesk they were surprised by the level of engagement their paper received. “It is just early-stage research,” they said.
“The intention was to have a constructive discussion of this approach to preventing theft,” they continued. “This work is certainly *not* a fully-fleshed [token] standard. Far from it.”
Many critics, moreover, seemed to misinterpret the proposal, according to the researchers.
“One misunderstanding, which surprised us, is that people thought the proposal is to make all transactions reversible on [a layer 1 blockchain], or to replace the regular ERC-20/721 standards,” they wrote. “This is not the case. The paper is simply a proposal for a token standard that people can use or not, just like any other token standard.”
The researchers admit, however, the challenges of designing a fair system for arbitrating transaction disputes.
“If there is no way to architect a judicial system, then this proposal will not work,” they said. “Designing a fair judicial system (or proving that one does not exist) is an open question for the community to think about.”
Even as the proposal received criticism in some corners of the crypto community, it also earned a considerable amount of support.
Emin Gün Sirer, the creator of the Avalanche blockchain, called the proposal a “Great idea” – noting that it was similar to one that he’d suggested previously and suggesting it “should be deployed more widely.”
Regarding criticism around corruptible judges, Daniel Goldman, an engineer at Ethereum scaling company Offchain Labs, noted, “Those outcrying against this seem unaware of how many widely used ERC-20 tokens today have centralized admins with *complete* power to arbitrarily rug its holders (mint, burn, freeze, etc.) and get little-to-no pushback for it.”
Goldman’s characterization of the Stanford proposal sounds almost like a “clean needles” program for permissioned DeFi. If “decentralized” finance applications already build human control levers into their products, it’d be better that those levers be clearly specified.
“They aren't talking about replacing the ERC-20 standard itself (AFAIK, nobody is); if you're not a fan of centralized/governable ERC-20s, don't use them!” Goldman tweeted. “... [H]ell, even having a ‘literally centralized’ standard would be a net win for the sake of transparency; anyone who's done the work of inspecting token contracts to figure out how centralized they are (👋) knows how tricky and annoying it is.”
Brent Xu, the founder of the blockchain Umee, took issue with the tenor of the criticism surrounding the proposal. “Considering that you guys struck a huge nerve in Crypto Twitter shows that this idea is worth exploring,” he tweeted. “The community needs to continue to explore the flaws and merits of a design before immediately casting it aside.”
Above all, the researchers suggest that before coming to conclusions people should do them the favor of reading the paper.