Robert Steinadler, 2 months ago
An open and public blockchain is censorship resistant. This is the case with Bitcoin and Ethereum as well as many others. Some blockchains don’t need censorship resistance since they are kept private which often means that they run in a corporate environment and serve a different purpose. Censorship resistance is what makes blockchain technology so disruptive. No authority on this planet, not even nation-states can interfere with transactions. This makes each network that is considered to be censorship resistant immune to dictators and the persecution of innocent people.
What is the downside of censorship resistance and what are three researchers from Stanford proposing to change that?
Over the last two years, it became clear that cybercrime is a real problem in the whole crypto space. DeFi applications get exploited and investors fall victim to phishing scams. Billions of dollars worth of crypto have been lost and most of the stolen assets were tokens on the Ethereum blockchain.
This is why three researchers from Stanford published a paper that suggests creating two new token standards called ERC-20R and ERC-721R. Both would offer the option for a victim to appeal fraudulent transactions before a committee of judges and also include the possibility of freezing disputed assets. While this would greatly benefit the DeFi space and make things more secure it also raises several questions.
The most pressing point is how to choose the judges and how to incentive them to act in good faith and not take sides with any party for a selfish reason. The disputing party has three days to appeal after the fraudulent transaction happened. Two more days are required for the judges to come to a conclusion. Parties can also submit evidence to support their claims. But on what grounds are the judges making their decision from a legal perspective?
Code is not the law in most countries and judges could possibly risk becoming involved in a real lawsuit themselves if one of the parties is not satisfied with their judgment. It is limited to what happens on-chain, but does not extend to the status of a legally binding agreement. Last but not least, those judges are human and failable.
Interestingly enough, the researchers are leaving it open for discussion on how to choose judges and what kind of qualifications would suffice for that position.
Another even more exciting point is that this proposal could change the very purpose of blockchain technology by transferring the legacy financial system and all of its flaws. Banks could be reduced to dApps and a reliable process of disputing transactions would contribute to such a vision. The only problem is that the disruptive potential comes from censorship resistance and the irreversibility of transactions.
Critics fear that once the new token standards are implemented and judges are put in a position of power, the whole idea of having a system that cannot be corrupted or interfered with becomes eroded. It is indeed the question of whether such a proposal would lead to new demands from governments who like to have a saying about what is going to happen on the blockchain. The very idea of blockchain technology is to eliminate an intermediary that acts as a trusted party. With the recent proposal, an element gets introduced to an environment that was built with no need for such a party.
At the current stage, the proposal is very early and far from being discussed as an Ethereum Improvement Proposal (EIP). It already caused controversy within the Ethereum community because some people agree with it while others fear that the Ethereum blockchain could be corrupted by such a system. A third approach is to make both token standards voluntary, meaning that investors can opt for the reversible standard or the “old” irreversible version of each token. If the Ethereum Foundation should decide to pick up on the idea it might be the most important move in the history of Ethereum right after the Merge and the shift to proof of stake.
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