Original | Odaily Planet Daily

Author | jk

Research on Reversible Transactions by Circle

Circle President Heath Tarbert recently stated to the Financial Times that the company is researching mechanisms that can roll back transactions in cases of fraud and hacking while still maintaining settlement finality. He pointed out, "We are thinking… about whether it is possible to have reversible transactions, but at the same time, we also want to maintain settlement finality."

In simple terms, if you are scammed or hacked, theoretically, you could get your money back.

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

Tarbert also specifically mentioned that some benefits of traditional financial systems are not present in the current crypto world, and some developers feel that there should be "some degree of anti-fraud rollback functionality" when everyone agrees. In other words, Circle wants USDC to resemble traditional financial products more closely, so that banks and large institutions can use it with confidence.

However, this proposal has sparked intense controversy in the crypto community. Critics worry that this could lead to centralization in the DeFi ecosystem: if Circle can arbitrarily roll back transactions, doesn't that make it 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 deal with hacking and illegal activities.

Tether's Active Intervention Model

According to documents, Tether has built-in "blacklist" and "backdoor" mechanisms in the USDT smart contract, allowing it to freeze specific addresses, suspend the USDT transfer function from that address, and further execute destruction and reissuance operations. This mechanism enables USDT to "correct wallet-level errors" in extreme situations.

In September 2020, when KuCoin exchange was hacked, Tether urgently froze about $35 million worth of USDT to prevent further transfers. In August 2021, during the Poly Network cross-chain bridge hack, Tether immediately froze approximately $33 million worth of USDT in the hacker's address. As of September 2024, Tether claims to have cooperated with 180 global institutions to freeze at least 1,850 wallets suspected of illegal activities, assisting in the recovery of approximately $1.86 billion in assets.

Circle's Cautious Compliance Approach

In contrast, Circle follows a compliance route. The USDC contract also has a blacklist function to prevent token flow from specific addresses, but Circle typically only freezes addresses upon receiving valid law enforcement or court orders. Circle clearly states in its terms of service that once USDC completes an on-chain transfer, the transaction is irreversible, and Circle has no right to unilaterally revoke it.

This difference is quite evident in practical applications. When users fall victim to scams and send USDC to a scammer's address, Circle usually does not proactively freeze that scammer's address unless law enforcement intervenes. This sharply contrasts with Tether's willingness to assist users in certain technically feasible scenarios.

After the U.S. sanctioned the privacy tool Tornado Cash in August 2022, Circle proactively froze approximately $75,000 worth of USDC on the sanctioned Ethereum addresses to comply with the sanctions. In September 2023, at the request of Argentine authorities, Circle froze two Solana addresses belonging to a scam "LIBRA" token team, totaling about 57 million USDC.

These cases indicate that while Circle is generally conservative, it will act decisively when there are clear compliance requirements. Tether, on the other hand, is more proactive and willing to cooperate with users and law enforcement. The governance styles of the two companies are indeed quite different.

Evolution of Ethereum's Reversible Transaction Proposals

As the largest smart contract platform, discussions around transaction reversibility on Ethereum have a long history. From the 2016 DAO incident to various proposals in recent years, this topic has consistently engaged the entire community.

EIP-779: Historical Record of the DAO Hard Fork

EIP-779 does not propose new features but records and explains the hard fork operation taken in response to the 2016 The DAO hack. At that time, hackers exploited a vulnerability in the DAO contract to steal approximately 3.6 million ETH. After intense debate, the community chose the hard fork solution, resulting in an "irregular state change" in blockchain history.

This hard fork did not technically roll back block history but modified the balance state of specific accounts, deducting the ETH stolen by the hacker from the "Child DAO" contract and transferring it to a refund contract, allowing original DAO investors to proportionally reclaim their ETH. This action was implemented in July 2016, directly restoring the victims' funds but also causing a community split, with some members insisting on "code is law" refusing to acknowledge this modification and continuing to use the non-forked chain, forming what is now known as ETC.

EIP-156: Ethereum Recovery for Common Stuck Accounts

EIP-156 was proposed by Vitalik Buterin in 2016 to provide a mechanism for recovering specific types of lost ETH. The background was that early users had their ETH stuck in unmanageable addresses due to wallet software defects or operational errors. The proposal envisioned introducing a proof mechanism: if users could provide mathematical proof that a certain ETH was lost by them and met specific conditions, they could initiate a withdrawal request to transfer that ETH to a new address.

However, EIP-156 has remained in the proposal discussion stage and has not been included in any Ethereum upgrades. After the Parity wallet incident in 2017-2018, there were suggestions to extend EIP-156 to resolve Parity lockups, but it was found that the proposal only applied to addresses without contract code, being ineffective for cases like Parity, which had contracts but were self-destructed.

EIP-867: Controversy Over Standardized Recovery Processes

EIP-867 is a "Meta EIP" proposed in early 2018, officially titled "Standardized Ethereum Recovery Proposal." It does not execute specific recovery operations but defines a template and process for any future proposals requesting the recovery of lost funds. Its original intention was to provide a framework for such proposals, specifying what information must be included in a recovery request and what objective standards must be met.

After EIP-867 was submitted on GitHub, it ignited a community debate. The then EIP editor Yoichi Hirai rejected its merging into a draft on the grounds of "not aligning with Ethereum philosophy," and later resigned from his editorial position due to concerns that continuing to push it might violate Japanese law. Opponents argued that "code is law," and frequent fund recovery would undermine Ethereum's credibility as an immutable ledger. Many openly stated that if 867 were allowed to pass, they would switch their support to Ethereum Classic.

Supporters emphasized flexibility, arguing that when fund ownership is very clear and recovery has minimal impact on others, it should be allowed at discretion. However, ultimately, EIP-867 became a litmus test for community sentiment, with most choosing to defend the cornerstone of "immutability," leading to the proposal's abandonment.

EIP-999: Failed Attempt to Unfreeze Parity Multisig Wallets

EIP-999 was a proposal submitted by the Parity team in April 2018, attempting to resolve the massive funds frozen due to a significant vulnerability in the Parity multisignature wallet in November 2017. This vulnerability led to the accidental self-destruction of Parity's multisig library contract, freezing approximately 513,774 ETH that could not be transferred. EIP-999 proposed to restore the self-destructed library contract code at the Ethereum protocol layer, thereby unlocking all affected wallets.

To gauge community opinion, Parity initiated a week-long coin vote on April 17, 2018. The results were close but slightly against: about 55% of voting power chose "do not implement," 39.4% supported EIP-999, and another 5.6% remained neutral. Due to not receiving majority support, EIP-999 was ultimately not included in subsequent Ethereum upgrades.

Opponents argued that while it did not involve a complete rollback, modifying contract code still violated immutability, and this action clearly favored Parity and its investors' interests. A deeper reason for opposition was a principled issue: some believed that the Parity multisig library, as an autonomous contract, should act solely according to code, and reversing its state would amount to human intervention in a chain state that should not be 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 blockchain researchers at Stanford University in September 2022, where "R" stands for Reversible. These standards attempt to extend the currently most commonly used ERC-20 (tokens) and ERC-721 (NFTs) standards by introducing mechanisms for freezing and revoking token transfers.

When a transfer based on ERC-20 R occurs, there will be a brief dispute window during which, if the sender claims the transaction is erroneous or has been hacked, they can submit a request to freeze the assets involved in that transaction. A group of decentralized arbitration "judges" will adjudicate 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 light of the $7.8 billion in crypto thefts in 2020 and $14 billion in 2021, the completely irreversible transaction model has become a barrier to mainstream adoption, and introducing a reversible mechanism could significantly reduce losses caused by hackers.

However, opposing voices are also quite evident: many are disturbed by the "decentralized judges" mechanism in the proposal, believing it contradicts the DeFi principle of trustlessness. Skeptics worry that human involvement could introduce censorship and regulatory intervention, with governments potentially using this mechanism to revoke transactions, eroding the blockchain's anti-censorship characteristics.

Over the years, the "rollback" incidents in blockchain history

By sorting through significant events related to "rollback" in the history of blockchain development, 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 that occurred from June to July 2016 is considered the first case in blockchain history of a human "rollback" of hacker results. After hackers stole approximately 3.6 million ETH from the DAO contract, the Ethereum community voted to implement a hard fork in July, transferring the stolen ETH into a refund contract to restore it to investors. This move caused a split in the community, with opponents remaining on the non-rolled-back chain, forming Ethereum Classic, which laid the groundwork for a cautious attitude towards reversibility.

2017: The Double Blow of Parity Wallet

In July 2017, the Parity multisig wallet was hacked for the first time, with hackers exploiting a vulnerability to steal about 150,000 ETH. After the vulnerability was fixed, another incident occurred in November: a developer's operational error led to the self-destruction of the Parity multisig library contract, freezing approximately 513,000 ETH. This event directly spurred recovery proposals like EIP-999, but ultimately none received community support.

2018: EOS's 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. The community had mixed opinions on this on-chain arbitration, and ultimately the arbitration system was weakened. This experience demonstrated that high-intensity centralized governance can provoke backlash, damaging EOS's reputation and proving the decentralized community's natural aversion to excessive human intervention.

2022: Successful Loss Prevention on BNB Chain

In October 2022, hackers exploited a vulnerability in the BSC cross-chain bridge to mint approximately 2 million BNB (valued at nearly $5.7 billion). Upon discovering the anomaly, the Binance team immediately coordinated with BNB Chain validators to urgently pause the blockchain, and then released a hard fork upgrade within days, patching the vulnerability and freezing most of the untransferred BNB in the hacker's address. According to Binance, about $100 million in funds was transferred out of the chain by the hacker, while the vast majority of the rest was "under control."

This incident proved that on a blockchain controlled by a few trusted entities, consensus can be quickly reached to execute rollbacks or freezes, even for large amounts. Conversely, this also drew criticism from the decentralized camp, arguing that BNB Chain resembles a database that can be arbitrarily intervened with, lacking the censorship resistance expected of a public chain.

Successful Cases of Stablecoin Freezing

In situations where chain-level rollbacks are not possible, the freezing mechanism of stablecoins has become an important tool for recovering funds. After the KuCoin exchange was hacked in September 2020, multiple parties coordinated responses, with Tether freezing about $35 million in USDT, and various projects upgrading contracts to freeze stolen tokens, recovering over half of the assets. In August 2021, during the massive hack of the Poly Network cross-chain bridge, Tether quickly froze $33 million in USDT. Although other on-chain assets could not be frozen, the hacker ultimately chose to return all funds, partly due to the difficulty of cashing out because of the stablecoin freezes.

Conclusion: Finding a Balance Between Immutability and User Protection

Circle's exploration of reversible transactions reflects a fundamental contradiction: how to provide necessary protection mechanisms for users while maintaining the core value of blockchain immutability. From a technological development perspective, there is indeed tension between complete irreversibility and the complex demands of the real world.

Current solutions exhibit a layered characteristic: the underlying blockchain remains immutable, but various "soft reversibility" options are provided at the application layer, token layer, and governance layer. The freezing mechanism of stablecoins, delayed confirmations of multisig wallets, and arbitration interfaces of smart contracts all achieve a certain degree of risk control without modifying on-chain history.

If Circle's proposal is ultimately implemented, it will represent a move towards traditional financial standards in the stablecoin space. However, its success depends not only on technical implementation but also on whether it can gain recognition from the crypto community. Historical experience shows that any attempt to normalize transaction rollbacks will encounter strong resistance, and it remains to be seen whether Circle can find a delicate balance between protecting users and maintaining decentralized trust.

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