Dec 6, 2023 4 min read

Decentralized Platform, Centralized Control

It's an open highway, but some strings may still be attached.

As I've built out this blog, I've tried to cover a few concepts that may not be so obvious to newcomers. So, in that spirit I want to discuss the fact that centralized digital assets (and "digital assets" includes cryptocurrencies) can operate on decentralized blockchains.

This may seem odd at first glance. After all, decentralized blockchains are designed to function outside the control of any single person or entity. And let's be frank here - "outside the control of any single person or entity" is commonly interpreted as "free from government control and censorship."

So why would someone release a centralized digital asset on a decentralized blockchain? The quick answer is that it enables the issuer to maintain control over that asset. The motivations behind this setup range from benevolent to malicious, and they’re worth additional discussion; however, I’m not interested in going down that path in this short piece. I simply want to point out that there are digital assets on decentralized blockchains that can be manipulated by central authorities.

Let’s use Tether (USDT) as an example. It’s a stablecoin pegged to the US dollar, and it’s by far the most popular one in the marketplace. It operates on several different blockchains, and I’ll take a look at the version that runs on the Ethereum blockchain for today’s discussion.

Sidebar: Externally Owned Accounts vs. Contract Accounts

Externally owned accounts (EOAs) are Ethereum accounts that users control. For example, Bob can send some ether - the native cryptocurrency of the Ethereum blockchain - to Alice, and no single person or organization can block that transaction. Contract accounts contain executable code. An EOA can make calls to smart contracts and trigger execution. Smart contracts do not initiate execution, but once engaged by an EOA, a smart contract may make calls to other smart contracts. In our example, Tether's USDT tokens are controlled by a smart contract. They are not native to Ethereum's decentralized blockchain. So, if Bob wants to send USDT to Alice, he engages with a Tether smart contract address, and the smart contract code will execute the USDT transfer to Alice and map everyone's USDT balances to their EOAs. (Please see https://github.com/ethereumbook/ethereumbook/blob/develop/07smart-contracts-solidity.asciidoc and other sources for more details.)

Let’s look at this Tether smart contract address: 0xdAC17F958D2ee523a2206206994597C13D831ec7, and let’s run it through w1nt3r’s handy ABI tool to give us a nice summary of the contract’s functions.

Here’s the readout:

(https://abi.w1nt3r.xyz/mainnet/0xdAC17F958D2ee523a2206206994597C13D831ec7)

You’ll notice that “addBlacklist(address),” “getBlackListStatus(address),” “isBlacklisted(address),” “removeBlackList(address),” and “destroyBlackFunds(address)” are on the list.

So, what do those items mean? As a practical matter it means that the team behind Tether maintains control over USDT that it has issued. A quick search on the keyword “freeze” produced the following results on Tether’s own website. Keep in mind that the frozen USDT mentioned in these and other articles may exist on different blockchains, but the end result is the same. The funds are frozen, and alleged bad actors can’t move them. Please note that Tether can also apply these methods to help people recover funds that they've mistakenly sent to the wrong address.

And you don't have to rely on official news releases or company blogs to be notified of frozen accounts. Given the transparency that a blockchain like Ethereum offers, third parties can also see when Tether freezes funds. Blockchain security firm PeckShield tweeted the notification below in August 2023. They identified the actor and amount involved in the fraud, and more importantly for our discussion, they pinpointed the transaction showing that Tether had blacklisted the bad actor's Ethereum address.

(https://twitter.com/PeckShieldAlert/status/1686278380306731008. The link to the transaction referenced in the tweet is at https://etherscan.io/tx/0x2675aaf5db84f9f966c431ff82f2173d3251020b11b4939b4961ebedf92c78dd/advanced.)

These quick examples demonstrate that issuers of centralized digital assets still maintain control even when those assets have been deployed on decentralized blockchains. While no single entity can manipulate a decentralized blockchain, that’s not the case with centralized digital assets. If you’re so inclined, I highly recommended reading more about their pros and cons.

Thanks.