Sky’s New USDS Stablecoin Introduces Freeze Function
In a recent update, the DeFi lending platform MakerDAO has rebranded itself as Sky, marking a significant milestone in co-founder Rune Christensen’s Endgame strategy. However, the introduction of its new USDS stablecoin has sparked a mixed reaction within the crypto community. The most contentious aspect of USDS is its embedded freeze function, which grants Sky the authority to halt transfers from users’ wallets. While this feature is intended to deter criminal activities, particularly among hackers, it has raised concerns among security analysts regarding its practical implications.
Michael Lewellen, Head of Solutions Architecture at OpenZeppelin, expressed skepticism about the effectiveness of the freeze mechanism, stating that its success will largely depend on how and when the Sky team chooses to activate it. He highlighted the slow response of Circle’s USDC, another stablecoin with similar capabilities, which has faced delays in freezing stolen assets due to the requirement for legal intervention. Lewellen acknowledged that introducing such a feature could make USDS less appealing to malicious actors, who have historically favored DAI for its lack of freeze controls.
Understanding the Role of Centralized Stablecoins
Stablecoins like Tether’s USDT and Circle’s USDC come equipped with freeze functions that enable them to seize funds from illicit users and comply with anti-money laundering laws. For Sky, which has fortified DAI with $2 billion in real-world assets, including U.S. government bonds, adhering to regulatory frameworks is imperative. Currently, DAI holds the position of the third-largest stablecoin in the cryptocurrency market, boasting a circulating supply of approximately $5.3 billion. Meanwhile, Sky manages user deposits amounting to $6.4 billion, with aspirations to expand DAI’s supply to an ambitious $100 billion.
Concerns Over Centralization and Trust
Despite the potential benefits of the freeze function for enhancing security, many critics argue that it contradicts the fundamental ethos of cryptocurrencies, which promote a decentralized and trustless financial system. By allowing a central authority to freeze tokens, it places users in a position of having to trust that the power will not be misused. This lack of immutability has historically provided a safe haven for hackers, who often convert stolen assets from freeze-enabled stablecoins into DAI or other decentralized assets without restrictions. A notable example includes the hacker who misappropriated $450 million from FTX, who quickly exchanged portions of the stolen funds for DAI.
A Mixed Outlook for the Future
Grzegorz Trawínski, an auditor at Hacken, views the introduction of the freeze function as a crucial advancement for the security and sustainability of the crypto ecosystem. He believes it signifies a broader acknowledgment within the industry that centralized mechanisms can play a vital role in protecting platforms and their users. However, Sky intends to maintain an unfreezable version of its stablecoin. In a May post on the Sky governance forums, Christensen outlined plans for transitioning DAI into PureDai, an immutable version that will operate independently of Sky.
While the original DAI will continue to exist and cater to users who prefer decentralized options, including potential criminals, there is a significant consideration: if the new USDS stablecoin gains traction and becomes successful, it may lead to a decline in DAI’s liquidity. Consequently, with a reduced circulation of DAI, it would become increasingly challenging for bad actors to exploit the asset for their purposes.
Author
Chris Munch is a professional cryptocurrency and blockchain writer with a background in software businesses, and has been involved in marketing within the cryptocurrency space. With a passion for innovation, Chris brings a unique and insightful perspective to the world of crypto and blockchain. Chris has a deep understanding of the economic, psychological, marketing and financial forces that drive the crypto market, and has made a number of accurate calls of major shifts in market trends. He is constantly researching and studying the latest trends and technologies, ensuring that he is always up-to-date on the latest developments in the industry. Chris’ writing is characterized by his ability to explain complex concepts in a clear and concise manner, making it accessible to a wide audience of readers.
