Allowing Reversible Crypto Transactions, and Ethics of the Crypto Market

The Wintermute hack is the latest bug exploit that adds more booty to the overall tally of $1.9 billion worth of cryptocurrencies stolen in 2022. The UK based exchange operates in the De-Fi space, where market makers like Wintermute provide liquidity to big exchanges. Wintermute now owes millions to its debtors. Crypto wallets and addresses can be tracked for movement of transactions, but the identities of their owners remain anonymous. What if these transactions taking place on the blockchain could be reversed with an appeal by the owner?

Since blockchains are networks of computers, and all money transfers happen automatically, there is no central authority or decision maker to reverse the transactions. A bitcoin sent is gone forever. With a bank or online payment gateway, the transactions can be frozen or blocked by the sender within a certain duration of time, say a few days up to a few weeks.

Researchers from Stanford University have proposed such a transaction freeze and reversal system that works at the blockchain or protocol level.

Reversible crypto transactions – get the stolen Ether back with appeals and judges

Blockchain researchers Kaili Wang, Dan Boneh and Qinchen Wang have recently opened up discussion on what such a crypto payment reversal system could look like on Ethereum in a research paper.

The aim of such as system is to recover some, if not all, of the stolen crypto back. This is also not a concept of creating reversible tokens, or coins that allow transactions to be reversed. The ideas proposes a new token type, taking inspiration from Vitalik Buterin’s tweet in 2018 to create “Reversible Ether” backed by 1:1 in Ethereum and a governance structure.

In the new system, the transaction running on the proposed ERC-20R protocol can be frozen for a few days after which it will become irreversible. The wallets or accounts will also show such transactions in a separate category of reversible payments or receipts.

The reversible crypto system introduces a bench of judges in a decentralized network. The process, outlined by Kaili Wang in a series of tweets, works as follows:

  1. Theft is noticed. Victim sends out request to freeze stolen funds wherever they are.
  2. Appeal is taken up by decentralized court, and they vote to either accept or reject the request. Evidence is used in a pre-liminary manner.
  3. Accepted request leads to a freeze of the funds in their current address. The process to freeze is outlined in the paper.
  4. In the trial period, evidence is taken from both sides. Judges vote their final decision
  5. If request is approved, funds are sent back to the owner’s address.

Wang acknowledged that this is “an incomplete solution… Our paper provides some pieces of the puzzle (focuses on the mechanics), but we mention many open questions surrounding decentralized gov.”

Is the crypto trading market as ethical as equity exchanges?

While on one hand, millions of dollars have been lost to thefts and hacks, the overall crypto trading environment received a thumbs down from billionaire Orlando Bravo. The Financial Times reported Bravo’s disappointment with some “parts of the crypto industry” that don’t measure up to equity markets.

The economic slump has affected both equity and crypto markets equally in the last few months. This has resulted in more interest in stable coins. As per reports, stable coin net inflows were about 58% higher comparted to last week. Crypto assets aren’t more resilient than equities, and Bank of America recently cautioned that they continue to be risk assets.


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