Are Decentralized Networks Really Decentralized? A Story of Forking and Freezing 🍴
In the last piece, we spoke about stablecoins and their role in the Dapp ecosystem. We have talked about the risks on-chain before, but what if the real risk turned out to be on centralized exchanges?
Have you ever watched a heist happen and followed it in real-time? Well, yesterday one such heist occurred. One of the largest cryptocurrency exchanges, Kucoin reported a hack of an amount close to $280 million, making it the third-largest hack in crypto history.
That is in no way a thing to be proud of, but the exchange's response to the hack sure is. They announced that they would cover the amount from the insurance. I have my doubts about paying back every one with the insurance money, but that's bold of them to claim. That builds trust among people and reduces their anxiety.
The bigger story, however, isn't about the hack. It is about the stolen funds and the response from some decentralized teams.
Remember when we spoke about stablecoin yesterday, we wrote that they come in two flavours: centralized and decentralized. It turns out; this applies not only to stablecoins but also many other ERC-20 tokens.
Project teams that were caught in the middle of the hack did something unprecedented. They deployed a new contract and froze the tokens, which were present in the hacker's wallet. This is a dangerous precedent that many teams set here. More than nine teams froze the ERC-20 balances with a hard update to their contract. So much for "code is law."
Why does it matter?
If you do it willingly now, you can be forced to do it later. There is no stopping regulators to come after the team and ask them to freeze assets.
The central argument in favour of decentralized networks was that no one person centrally controls the fund; however, the reality is different. A study in 2018 revealed that more than 50% of the then top-20 ERC-20 tokens could freeze the funds. That isn't good.
Now, not all the blame is on the teams. After the ICO hype cycle in 2017 where pre-product projects raised $50 million, people debated its downside and the best way to launch a decentralized project.
One of the ideas that resonated with people was Jesse Walden's idea of progressive decentralization. In simple words, projects can follow a 3-step process - 1. Find a product-market fit 2. Community participation, 3. Sufficient decentralization. As suggested, there will be centralization and complete control in the initial stages, which can be given away slowly.
One such example is Synthetix, the yield farming pioneer in DeFi, which now has DAO that manages the decisions regarding the protocol and ecosystem. However, that is tough for a project to achieve. With today's event, any team moving towards progressive decentralization will now have the fear of regulatory pressure, asking them to censor funds or use their power to control/freeze the tokens or face legal troubles anytime.
The Big Picture
The meme "Not your keys, not your coins" fits perfectly in the current situation. So, there is a strong argument against holding funds on a centralized exchange. However, on the bright side, based on the response from the community, it seems people are starting to realize the importance of DeFi and holding funds in a non-custodial wallet.