Reversible Transactions on Ethereum: Potential Upside and Feasibility Question

A trio of blockchain researchers at Stanford University recently proposed introducing reversible transactions on Ethereum. The researchers, Dan Boneh, Qinchen Wang, and Kaili Wang believe that this, alongside new token standards, ERC-20R and ERC-721R, will help mitigate the theft of cryptocurrencies. According to a paper by K. Wang, the new tokens would prevent attackers from getting away with stolen funds.

In instances of cryptocurrency theft with massively undeniable evidence, the looted assets would be frozen. The victim would be required to put in a request to freeze the funds once they realize they have been exploited, tagged with the necessary evidence and a stake. There would also be a decentralized quorum of judges, whose function would be to weigh up the submission and determine whether the freeze should be reverted or accepted based on the evidence presented by both sides.

The proposal also included opt-in token standards that would play sibling to Ethereum’s ERC-20 and ERC-721 rather than replace them. They would not make the Ethereum blockchain reversible but would instead provide for a short time window after a transaction has been completed (such as three days) to provide the option to possibly restore an otherwise immutable transaction.

How it works for crypto exchanges

Swaps between two reversible tokens would be immediate on exchange platforms, implying that if a freeze request is placed on one side, it would be able to get the crypto reversed on the second side, irrespective of whether the window to reverse has elapsed.

To prevent reversals when swapping a reversible token for a non-reversible token, exchanges could establish measures such as finalizing the swap only after the reversible time window has passed. An exchange of reversible for non-reversible tokens would therefore have to wait until the funds become irreversible. The effect of this would be that once a few major alts introduce reversible versions of themselves, pressure is put on other tokens to do the same.

Tracing and locking stolen funds

The biggest challenge associated with stolen crypto is that the exploiters rarely handle the tokens in the huge ‘lumpsum’ form that they get them. The loot is almost always moved around with the help of coin mixers. Under the new token standards, the attacker could even gain prior information about an incoming freeze by monitoring the mempool.

The proposed measure to prevent the attacker from outrunning the freeze would be to perform the entire freeze in a single on-chain transaction. The algorithm would also only freeze funds where there has been a direct flow of transactions stemming from the theft.

NFTs

Ethereum non-fungible tokens’ standards do not feature divisible money as ERC-20s do. Therefore, performing a freeze of an account holding an allegedly stolen token would be enough to prevent the harm here. The NFT is relinquished by its current owner, and the ERC-721R contract transfers it back to the pre-theft owner if the judges find that a theft occurred.

Immediate concerns about the judicial system

The proposal to introduce an ‘undo button’ on the Ethereum blockchain has so far seen its fair share of criticism. Censorship concerns, the possibility of increased chargeback fraud, and similarity to traditional online payment systems have come to the fore. Some community members have suggested that alternative methods should be used rather than messing with the base layer.

On their part, the Stanford University blockchain researchers acknowledge that the decentralized quorum of judges is an even “more ambiguous piece of this puzzle.” They clarified that determining which entities are chosen as judges, how they are rewarded, and the voting structures would be up to the governance. There is more.

The judges would have to be disincentivized from taking bribes, and according to the paper, it is imperative to ensure that they are not permitted to add transactions or unilaterally change an individual’s balance. Still, there are supporters of the idea who believe an undo button could be the missing link to encourage traditional institutions to delve into crypto. Further, they opine that reversible transactions could offer blockchain users the much-needed assurance for their on-chain assets.

To learn more, check out our Investing in Ethereum guide.