Back in early 2022, hundreds of Canadian trucks formed a convoy to travel towards Ottawa in protest of mandated experimental mRNA "vaccines".
Instead of listening to the truckers' concerns that these jabs may in fact be ineffective and dangerous (as they turned out to be), the government chose instead to freeze the bank accounts of organizers, and people who donated to the movement.
Likely taken aback by the government's actions, the truckers learned a couple of harsh lessons that day:
- Their right to protest is not enshrined.
- More importantly, they are not the true owners of their money.
In the world of TradFi (traditional finance), we place a lot of trust in governments and banks to take care of our money. This works out fine when they respect our rights, but not so well when they turn their backs on us.
Bitcoin Is Trustless
Let's imagine that instead of Canadian dollars in a bank account, those truckers had owned self-custody Bitcoin. If that had been the case, neither the government nor the banks could have confiscated their money. Why's that?
Unlike a bank, Bitcoin is a network composed of thousands of independently operated nodes, all of which would have to be updated simultaneously in order to modify a single account. Not an easy feat, especially considering the nodes are spread out over multiple legal jurisdictions.
Let's say a single Bitcoin node succumbed to pressure from an authority to freeze a particular address on the blockchain. The sole outcome would be the invalidation of that specific node from the network.
In reality, the only way to "suspend" a Bitcoin address is to fork it from the blockchain, something that would require the agreement of all node operators, and happens very rarely.
Different from a traditional bank account, Bitcoin doesn't require trust in third-parties. The system operates automatically, without human intervention, purely based on sound math and cryptography.
Moreover, all transactions on Bitcoin are completely transparent. Therefore, threats like mining pool censorship and 51% attacks can be detected by anyone who is monitoring the network.
The same trustless concept applies to Ethereum, so long as we're talking about its native coin ETH, and not any tokens that are laying atop it.
Tokens Are Transparently Trustworthy
Ethereum introduced the concept of smart contracts and digital tokens - crypto assets that differ from the native coin of a blockchain, especially in terms of trust.
A couple examples of well-known tokens on Ethereum are USDC (a fiat-backed stablecoin) and LINK (an Oracle service). Anybody who has enough ETH (to cover the gas fees) can upload a smart contract to the Ethereum blockchain, and mint their own token.
Here's where the trust issues comes in. Whoever owns the corresponding private key of the contract can perform an upgrade of the code at anytime, and therefore has the ability to freeze tokens.
In fact, this happened when an English court ordered Oasis to upgrade their contracts in order to confiscate crypto from a hacker in early 2023. In another case, US authorities ordered Circle to suspend a specific USDC stablecoin account. These incidents are important to keep in mind when weighing investment risks.
Unlike pure Bitcoin, the government could have suspended the truckers' money had they stored it as USDC stablecoins atop of Ethereum (linked to their real-world identities). Pressure can be applied to a centralized entity like Circle just as it can to private banks.
What is the difference then, between storing your money in a traditional bank account, and holding USDC atop of Ethereum? After all, both can be suspended if the right people are coerced.
The main distinction here is transparency.
If the owner of a smart contract made a code upgrade to confiscate tokens, the entire world would instantly become are of it, and answers would be demanded. Bankers, on the other hand, can manipulate and suspend accounts in secrecy.
The inherent transparency of blockchain technology acts as a strong deterrent to the manipulation of tokens without following proper governance procedures.
Solana Adds Freeze Authority
Solana, a high-throughput blockchain that is expected to power a lot of up-and-coming DePIN and RWA projects, has made it even easier for dapp developers to suspend user tokens.
Smart contracts on Solana can be configured with a "freeze authority" address, allowing for easy censorship. In fact, the smart contract controlling the HNT tokens of the popular Helium project has this functionality enabled:
This may not be so important now, as the project is relatively new, and far less valuable than Bitcoin, but nevertheless we should be aware that Helium has the ability to freeze HNT tokens on a whim, or under pressure from an authority.
Aside from projects like Akash in the Cosmos ecosystem (which we'll discuss more below), most DePIN projects have launched on a generic blockchain like Solana or Polygon, and that means we are trusting the respective teams not to manipulate or freeze tokens.
If the potential of token confiscated concerns you, be sure to hold some coins that cannot be frozen. As we discussed earlier, Bitcoin is a great example of a non-confiscatable digital asset. Litecoin, Ravencoin, Dash, Digibyte, Bitcoin Cash, and the native coins of other layer 1 blockchains are also fairly censorship-resistant.
All that said, we still need a way to bring justice to the victims of hacks, while simultaneously balancing the rights of people who are protesting things like dangerous experimental mRNA jabs.
Automated Governance Is The Answer
When a hacker stole over $100 million dollars worth of ETH in 2016, the Ethereum community came to a fork in the road. Should they reverse the blockchain to recover the funds, or maintain the mantra of "unstoppable applications" and let the hacker keep his money?
Unfortunately, Ethereum did not have an on-chain governance mechanism in place to make this decision democratically, and a fork happened after much infighting. Thanks to that event, we now have blockchains like Cosmos-based Akash that come with built-in governance.
Akash is an application-specific blockchain, and its native token AKT is powering a decentralized compute marketplace. There is no central party that can unilaterally freeze AKT tokens. Rather, if members submit a proposal to the community to blacklist a specific address, and the majority vote "yes", the account will be automatically suspended.
The Future
As these DePIN and RWA projects continue to gain traction, a governance mechanism should be applied to them, in order to prevent centralized parties from unilaterally upgrading smart contracts or freezing tokens (whether by their own volition or as a result of external coercion).
Of course, changes often need to be made quickly when a project is just getting started, and community governance could slow down progress at early development stages. That said, these automated governance mechanisms should be implemented once a project has reached a certain level of maturity.
In the meantime, you should be aware that owning a token atop a blockchain is far riskier than owning its underlying native coin, especially in terms of potential censorship. This should be top of mind when doing risk analysis for your portfolio.
If you learned something new from this article, be sure to check out my other posts on crypto and finance here on the HIVE blockchain. You can also follow me on InLeo for more frequent updates.
Until next time...
Resources
Image Generation Courtesy of Venice AI [1]
USDC Locked Image [2]
Helium Freeze Authority Address [3]