Circle, a leading global financial technology firm, has announced the launch of two open-source protocols to address the challenges of on-chain theft and the risks of illicit finance in the crypto ecosystem. The protocols, called Freeze and Blacklist, aim to provide a standardized and transparent way for crypto platforms and users to freeze and unfreeze stolen or compromised assets, as well as to identify and block transactions involving blacklisted addresses.
Freeze is a protocol that allows crypto platforms and users to freeze or unfreeze their own assets in case of theft, loss, or other emergencies. Freeze works by embedding a freeze function into the smart contract of an asset, which can be triggered by the owner of the asset or by a designated freeze agent.
The freeze function can also be revoked by the owner or the agent, restoring the normal functionality of the asset. Freeze is designed to be compatible with any ERC-20 token, as well as other smart contract platforms that support similar functionality.
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Blacklist is a protocol that allows crypto platforms and users to identify and block transactions involving addresses that are associated with illicit finance, such as money laundering, terrorism financing, or sanctions evasion. Blacklist works by creating a public registry of blacklisted addresses, which can be updated by a network of trusted blacklist agents.
The registry can be queried by any crypto platform or user to check the status of an address before sending or receiving funds. Blacklist is designed to be compatible with any blockchain network that supports address-based transactions.
Circle; Barrier to Entry: Theft and Security
Annual losses due to token theft and accidents are in the billions of dollars. In 2021, $3.3 billion was stolen in crypto hacks, and that number jumped to $3.8 billion in 2022.
The immutability, or irreversibility of blockchain transactions is a fundamental characteristic that offers key benefits. However, it also presents challenges, such as rendering thefts and illicit activities permanent and irretrievable by default. This reality makes it hard for many retail users, consumers, and businesses to adopt blockchain systems.
Recoverable Wrapped Tokens
One way to protect assets from theft is to strengthen the security of asset keys and to improve the quality of Web3 code. A complementary approach, explored in depth last year by Stanford researchers including Dan Boneh, is to extend the ERC-20 interface to support asset recovery with the “ERC-20R.” In the same vein, the Circle Research team explored recoverable wrapper tokens, building upon the aforementioned Stanford research paper. Our effort aims to construct a configurable and programmable recovery mechanism to benefit both developers and users of ERC-20 tokens.
This proposed mechanism revolves around recoverable wrapper tokens. Users can wrap their ERC-20 asset by locking them in the recoverable wrapper token contract in order to receive an equal number of wrapper tokens in return. Wrapping the tokens protects users from thefts, and still maintains most of the utility found in the token’s base form.
One core difference, however, is that recoverable wrapper tokens can be recovered back to the sender within a certain time window post-transaction (say, 24 hours). Consequently, each user will have two distinct balances of the token: a settled balance (non-recoverable) and an unsettled balance (recoverable). Only settled tokens may be unwrapped back into their base form.
Building beyond the thesis put forth in the ERC20R paper, we present multiple configuration sets, or ways to implement and design a recoverable wrapper token, each with their own use cases and attributes. For instance, one version is an arbitrated wrapper appropriate for a targeted, designated ecosystem with a trusted governance.
Another version offers more of a cancellable send button, where transactions simply take a longer, custom period of time to settle than the chain’s finality. Different configuration sets can still be interoperable with each other, as long as they conform to a shared interface. We provide the IERC20R contract as this interface.
As an example, we developed the arbitrated wrapper version for protecting USDC or any token (completed audit report coming soon). This will soon be available for Circle’s recently unveiled Smart Contract Platform, so developers have a template to experiment with and provide token recoverability features to their users.
Circle believes that these protocols can enhance the security and compliance of the crypto ecosystem, while preserving the core principles of decentralization, transparency, and user sovereignty. Circle invites other crypto platforms and users to join them in adopting and contributing to these protocols, which are available as open-source projects on GitHub.