Original Title: "Circle Planning to Introduce 'Regret Mechanism'? Reversible Transactions for Stablecoins Spark Debate in the Crypto Community"

Original Author: jk, Odaily Planet Daily

Circle's Reversible Transaction Research

Circle's CEO, Heath Tarbert, recently told the Financial Times that the company is exploring a mechanism that would allow transactions to be rolled back in cases of fraud and hacking, while still maintaining settlement finality. He stated, "We are contemplating whether it is possible to have reversibility of transactions, but at the same time, we also want there to be settlement finality."

In simple terms, if you are scammed or fall victim to a hack, theoretically, you could reclaim the funds.

This reversible transaction mechanism will not be directly implemented on Circle's upcoming Arc blockchain, but will be achieved by adding a "reversible payment" layer on top, similar to how credit card refunds work. Arc is an enterprise-grade blockchain designed by Circle for financial institutions, and is expected to be fully operational by the end of 2025.

Tarbert also specifically mentioned that there are some benefits in traditional financial systems that the current crypto world lacks, and some developers feel that, in situations where everyone agrees, there should be "some sort of anti-fraud reversal function." In other words, Circle wants to make USDC more like a traditional financial product so that banks and large institutions can use it with confidence.

However, this proposal has sparked intense debate in the crypto community. Critics are concerned that this could lead to centralization of the DeFi ecosystem: if Circle can arbitrarily reverse transactions, doesn't it become the "central bank" of the crypto world?

Existing Intervention Mechanisms of Stablecoin Issuers

In fact, stablecoin issuers have always had the ability to freeze accounts. Tether and Circle, as the two major stablecoin issuers, have established relatively mature freezing mechanisms to address hacks and illegal activities.

Tether's Proactive Intervention Model

According to documentation, Tether has built-in a "blacklist" and "backdoor" mechanism in the USDT smart contract, allowing it to freeze specific addresses, suspend USDT transfers from those addresses, and further carry out burning and reissuing operations. This mechanism enables USDT to have the ability to "correct wallet-level mistakes" in extreme situations.

In September 2020, when KuCoin Exchange was hacked, Tether swiftly froze around $35 million worth of USDT to prevent further movement. In August 2021, during the Poly Network cross-chain bridge hack, Tether immediately froze approximately 33 million USDT in the hacker's address. As of September 2024, Tether claims to have cooperated with 180 global entities to freeze at least 1850 wallets involved in illicit activities, aiding in the recovery of about $1.86 billion in assets.

Circle's Cautious Compliance Approach

In contrast, Circle has chosen a compliance-oriented path. The USDC contract also features a blacklist function to prevent the movement of tokens to specific addresses, but Circle typically only freezes addresses upon receiving valid law enforcement or court orders. Circle expressly states in its terms of service that once a USDC transfer is completed on-chain, the transaction is irreversible, and Circle does not have the unilateral right to reverse it.

This difference is quite visible in practical applications. When users fall victim to scams and send USDC to a scammer's address, Circle usually does not proactively freeze the scammer's address for the individual unless law enforcement intervenes. This stands in sharp contrast to Tether's willingness to assist users in certain technically feasible scenarios.

In August 2022, after the US sanctioned the privacy tool Tornado Cash, Circle proactively froze approximately $75,000 worth of USDC on the sanctioned Ethereum address to comply with the sanctions. In September 2023, in response to a request from the Argentinian authorities, Circle froze two Solana addresses associated with the suspected fraud "LIBRA" token team, totaling around 57 million USDC.

These cases illustrate that although Circle is generally conservative, it acts decisively when faced with clear compliance requirements. On the other hand, Tether is more proactive, willing to actively cooperate with users and law enforcement. The governance styles of the two companies do differ substantially.

The Evolution of Ethereum Transaction Reversibility Proposals

As the leading smart contract platform, Ethereum has been immersed in discussions about transaction reversibility for a long time. From the 2016 DAO incident to various recent proposals, this topic has always been a nerve-wracking issue for the entire community.

EIP-779: Historical Record of the DAO Hard Fork

EIP-779 does not propose new functionality, but rather provides a record and explanation of the hard fork operation taken in response to the 2016 The DAO hack. At that time, the hacker exploited a DAO contract vulnerability to transfer about 3.6 million ETH. After intense debate, the community opted for a hard fork solution that led to an "irregular state change" in the blockchain's history.

This hard fork did not technically roll back the block history but instead modified the balance state of specific accounts. It deducted the ETH stolen by the hacker from the "Child DAO" contract and transferred it to a refund contract, allowing the original DAO investors to reclaim their ETH proportionally. Implemented in July 2016, this action directly recovered the victims' funds but also caused a community split. Some members, adhering to the "code is law" principle, refused to acknowledge this modification and continued using the unforked chain, leading to the formation of today's ETC.

EIP-156: Ethereum Recovery of Lost Ether in Common Account Lockouts

EIP-156, proposed by Vitalik Buterin in 2016, aims to provide a mechanism to recover ETH lost in specific situations. In the early days, some users lost ETH due to wallet software bugs or operational errors, leaving the ETH stuck in uncontrolled addresses. This proposal envisioned introducing a proof mechanism: if a user could provide mathematical proof that certain ETH was lost by them and met specific conditions, they could initiate a withdrawal request to transfer this ETH to their new address.

However, EIP-156 has remained in the proposal discussion stage and has not been incorporated into any Ethereum upgrade. After the 2017-2018 Parity wallet incident, some proposed extending EIP-156 to address the Parity lockup issue. It was found that this proposal only applied to addresses without contract code, rendering it powerless in cases like Parity, where there were contracts but they self-destructed.

EIP-867: Controversy Over the Standardization of Recovery Processes

EIP-867, a "Meta EIP" proposed at the beginning of 2018, stands for the "Standardized Ethereum Recovery Proposal." It does not execute specific recovery operations but rather defines a template and process for any future proposals seeking to recover lost funds to follow. The intention was to provide a structured approach for such proposals, outlining what information needs to be included in a recovery request and what objective criteria must be met.

After EIP-867 was submitted on Github, it sparked a community debate. The then EIP editor Yoichi Hirai rejected its merger into a draft citing "misalignment with Ethereum's philosophy," and subsequently expressed concerns about potential violations of Japanese law if the proposal continued to advance, leading him to resign from the editing position. Opponents argued that "code is law" and frequent fund recoveries could undermine Ethereum's credibility as an immutable ledger. Many openly stated that if 867 were allowed to pass, they would instead support the Ethereum Classic chain.

The support camp emphasizes flexibility, believing that when fund ownership is very clear and the impact on others is minimal, recovery should be allowed at discretion. However, ultimately, EIP-867 became a touchstone of community consensus, with the majority choosing to uphold the "immutability" cornerstone, and the proposal was abandoned.

EIP-999: Parity Multisig Wallet Unlock Failure Attempt

EIP-999 was a proposal submitted by the Parity team in April 2018, attempting to address the massive funds frozen due to a critical vulnerability in the Parity multisignature wallet in November 2017. This vulnerability led to the accidental self-destruction of Parity's multisig library contract, freezing around 513,774 ETH that could not be withdrawn. EIP-999 suggested recovering the self-destructed library contract code at the Ethereum protocol layer to unlock all affected wallets.

To assess community opinion, Parity initiated a week-long coin vote on April 17, 2018. The results were close, but opposition held a slight advantage: about 55% of the voting weight chose "not to implement," 39.4% supported EIP-999, and 5.6% remained neutral. As it did not receive majority support, EIP-999 was ultimately not included in subsequent Ethereum upgrades.

Opponents argued that although it did not involve a complete rollback, modifying the contract code still violated immutability. Moreover, this move clearly favored Parity and its investors' self-interest. A deeper reason for opposition was a matter of principle: some believed that the Parity multisig library, as an autonomous contract, should act entirely according to the code, and now reversing its state would be equivalent to artificially interfering with the on-chain state that should not have been altered.

ERC-20 R and ERC-721 R: Exploration of Reversible Token Standards

ERC-20 R and ERC-721 R are new token standard concepts proposed by Stanford University blockchain researchers in September 2022, where "R" stands for Reversible. These standards seek to extend the current most commonly used ERC-20 (token) and ERC-721 (NFT) standards by introducing a mechanism for token transfers that can be frozen and revoked.

When a transaction based on ERC-20 R occurs, there will be a brief dispute window, during which if the sender claims an error in the transaction or it was hacked, they can request to freeze the assets involved in the transaction. A group of decentralized arbitration "judges" will rule on the evidence to decide whether to execute the transaction rollback.

This proposal has caused a stir in Crypto Twitter and developer circles. Supporters argue that in the context of $7.8 billion in crypto theft in 2020 and $14 billion in 2021, the fully irreversible transaction model has become a mainstream adoption barrier. Introducing a reversible mechanism could significantly reduce losses caused by hackers.

However, there are also clear voices of opposition: many are unsettled by the "decentralized judge" mechanism in the proposal, believing it contradicts the DeFi principle of trustlessness. Skeptics are concerned that human intervention could introduce censorship and regulatory intervention, with governments potentially using this mechanism to rollback transactions, eroding the blockchain's anti-censorship features.

The "Undo Button" Events in Blockchain History

By reviewing major events in blockchain history related to "rollback," we can gain a clearer understanding of the application and impact of this mechanism in practice.

2016: The DAO Incident and Ethereum Fork

The DAO incident in June to July 2016 can be considered the first case in blockchain history where the results of a hacker's actions were manually "reversed." After the hacker stole around 3.6 million ETH from the DAO contract, the Ethereum community conducted a vote and implemented a hard fork in July. The stolen ETH was transferred to a refund contract and returned to investors. This action caused a community split, with dissenters staying on the non-rollback chain, forming Ethereum Classic, establishing a cautious attitude towards reversibility thereafter.

2017: Parity Wallet's Double Whammy

In July 2017, the Parity multisig wallet was first hacked, and hackers exploited a vulnerability to steal around 150,000 ETH. After the vulnerability was patched, another incident occurred in November: a developer's mistake led to the self-destruction of the Parity multisig library contract, freezing approximately 513,000 ETH. This event directly saw proposals for recovery like EIP-999, but ultimately none received community support.

2018: EOS' Arbitration Experiment and Failure

Within a week of the EOS mainnet launch in June 2018, its arbitration body ECAF froze a total of 34 accounts twice. Community reactions to on-chain arbitration were mixed, leading to the weakening of the arbitration system. This experience showed that intense centralized governance would lead to backlash, damaging EOS' reputation and proving the decentralized community's natural aversion to excessive human intervention.

2022: BNB Chain's Successful Stop Loss

In October 2022, hackers exploited a vulnerability in the BSC cross-chain bridge to fraudulently mint approximately 2 million BNB (worth nearly $5.7 billion). Upon discovering the anomaly, the Binance team promptly coordinated with BNB Chain validators to emergency pause the blockchain. Subsequently, within a few days, they released a hard fork upgrade, patched the vulnerability, and froze most of the untransferred BNB on the hacker's address. According to Binance, about $100 million funds were moved by the hacker off-chain, with the vast majority being "brought under control."

This event demonstrated that on blockchains controlled by a few trusted entities, swift consensus can be reached to execute rollbacks or freezes, even for large amounts. However, conversely, it has also attracted criticism from the decentralized camp, arguing that the BNB Chain resembles more of a database open to arbitrary intervention and lacks the censorship resistance that a public blockchain should have.

Successful Cases of Stablecoin Freezing

In situations where on-chain rollbacks are not feasible, the stablecoin freezing mechanism has become a crucial tool for fund recovery. In September 2020, after the KuCoin exchange was hacked, through multi-party coordination, Tether froze about 35 million USDT. Projects upgraded contracts to freeze stolen tokens, resulting in the recovery of over half of the assets. In August 2021, during the Poly Network cross-chain bridge hack, Tether promptly froze 33 million USDT. Although assets on other chains could not be frozen, the hacker ultimately chose to return all the funds, partly due to the difficulty in liquidating funds caused by stablecoin freezing.

Conclusion: Finding a Balance Between Immutability and User Protection

Circle's reversible transaction exploration reflects a fundamental contradiction: how to maintain the core value of blockchain immutability while providing users with necessary protection mechanisms. From technological trends, there is indeed tension between full irreversibility and the complex needs of the real world.

The current solutions exhibit a layered characteristic: the underlying blockchain remains immutable, but various "soft-reversible" options are provided at the application, token, and governance layers. The stablecoin freezing mechanism, multi-signature wallet's delayed confirmation, smart contract arbitration interfaces have all achieved some level of risk control without altering the on-chain history.

If Circle's proposal is ultimately implemented, it will represent a convergence of the stablecoin space towards traditional financial standards. However, its success depends not only on technical implementation but also on gaining acceptance from the crypto community. Historical experience indicates that any proposal attempting to normalize transaction reversals will face strong resistance. It remains to be seen whether Circle can find a delicate balance between protecting users and maintaining decentralized trust.

Original Article Link

Welcome to join the official BlockBeats community:

Telegram Subscription Group: https://t.me/theblockbeats

Telegram Discussion Group: https://t.me/BlockBeats_App

Official Twitter Account: https://twitter.com/BlockBeatsAsia