The address holding 100,000 USDC was blacklisted, rekindling the DeFi centralization problem?
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, Author: Robert Stevens, Compiler: Summer, published with permission.
After the decentralized stablecoin DAI was hit hard by the coronavirus market crash in mid-March, the DAI community opted for the option of adding the centralized stablecoin USDC as its collateral.
Now, Centre, the issuer behind the dollar-pegged centralized stablecoin USDC, has blacklisted an Ethereum address holding 100,000 USDC worth, effectively freezing the funds in the address. According to Circle's website, "USDC balances held in blacklisted addresses may be completely permanent and unrecoverable."
Suddenly, MakerDAO’s stablecoin, DAI, doesn’t seem so decentralized.
Stani Kulechov, CEO of Aave, a DeFi lending agreement, said: "Imagine if some USDC is mortgaged into a Maker vault (note: users generate and lend DAI by mortgaging cryptocurrency into Maker's vault), What could happen is that Center could use its function to blacklist an address and those funds (of that address) would then be locked in a vault,” which could weaken DAI’s peg to the dollar.
Although DAI may well "survive this shock" as USDC collateral as DAI currently accounts for less than 12% of ETH collateral.
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Why is Center blacklisting this address?
While crypto-related businesses largely operate in an unregulated environment, they must still comply with law enforcement, and Center is no exception.
Jake Chervinsky, general counsel of Compound, the new king of DeFi, tweeted: "The USDC blacklist has gone from a hypothetical concern to a real risk."
Centre, a joint venture between cryptocurrency exchange Coinbase and payments firm Circle, confirmed the blacklisting of the address to CoinDesk. “While we cannot comment on the specifics of the enforcement request, Center complied with a binding court order with appropriate jurisdiction over the organization,” CoinDesk reported.
While the incident is the first time USDC has blacklisted an address, Tether (USDT), the largest centralized stablecoin by market cap, has already blacklisted 39 addresses, according to a dashboard created by blockchain software developer Phillipe Castonguay. Ethereum addresses worth millions of dollars were blacklisted. Tether has been doing this since November 2017.
Both Center and Tether are centralized companies, and both have the ability to prevent the addresses holding these stablecoins from conducting transactions and cooperate with law enforcement, but this is contrary to the principles of decentralization advocated in the encryption field.
A policy document from Centre, reveals that the company will blacklist addresses that threaten the USDC network, or may do so to comply with a U.S. court order or global sanctions restrictions. "Centre reserves the right to block USDC transfers," the document reads.
Kadan Stadelmann, CTO of blockchain platform Komodo, said:
According to The Block, the current total supply of USDC exceeds 1 billion. See below:
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The centralization problem of DeFi
Michael Anderson, co-founder of Framework Ventures, a DeFi venture capital fund, said that's why he didn't invest in DAI. “It highlights that when you have a centralized entity, anything can be stopped because they can freeze those assets,” he said. Instead, he invested in Synthetix, which he claims is more decentralized.
Komodo's CTO Stadelmann said:
"If anything is notable, I think the whole (blacklisting) incident highlights the continued global demand for bitcoin. Of course, bitcoin is still volatile and as a savings tool, it's not the best option. But at the end of the day , it remains the best vehicle for enabling the transfer of value that cannot be confiscated and cannot be prevented.”
