- Sky’s new USDS stablecoin contains a freeze function in its code.
- This could make it less attractive to crypto criminals.
DeFi lender MakerDAO has just unveiled its long-awaited rebranding to Sky, the latest step in co-founder Rune Christensen’s so-called Endgame plan.
But the reception was mixed.
The most controversial change is that USDS, the new version of the DAI stablecoin, contains a freeze function in its code, giving Sky the discretion to stop USDS transfers from holders’ wallets.
While the move should make USDS a less attractive asset for malicious actors, including hackers, security experts have questions.
“The effectiveness of this measure will depend on how proactively the Sky team chooses to implement it and the circumstances in which they do so,” said Michael Lewellen, head of solutions architecture at OpenZeppelin, a cryptographic security company. DL News.
Lewellen noted that Circle’s USDC, another stablecoin with similar controls, has been slow to freeze stolen funds in some cases due to the need for formal legal requests.
“It’s certainly a step forward in making the market less attractive to criminals,” Lewellen said.
Cryptocriminals have historically preferred DAI over other stablecoins because of its lack of a freeze feature: no authority has the power to freeze or seize tokens.
Join the community to receive our latest stories and updates
Centralized stablecoins, like Tether’s USDT and Circle’s USDC, have freezing features, allowing them to confiscate funds from criminals and comply with anti-money laundering regulations.
For Sky, which backed DAI with $2 billion in real assets – including U.S. government bonds – compliance with such regulations is something it cannot ignore.
With a circulating supply of approximately $5.3 billion, DAI is the third-largest crypto stablecoin.
Christensen said Sky’s goal is to increase the supply of DAI to “$100 billion and beyond.”
Don’t freeze my DAI
Some don’t like this change because they say it goes against crypto’s promise of creating a trustless, decentralized financial system.
By giving an entity the power to freeze tokens, it forces users to trust that it will not abuse that power.
But at the same time, this ability not to freeze is a boon for hackers.
They regularly exchanged stolen assets with freezing features – like USDT and USDC – for DAI, or other non-freezable assets like Ether, whenever possible.
For example, the hacker who stole $450 million from FTX shortly after the defunct exchange declared bankruptcy in 2022 exchanged some of the stolen funds for DAI.
Grzegorz Trawínski, an auditor at Hacken, a company specializing in blockchain security, is optimistic.
“This is a step that could prove essential to ensure the longevity and security of the ecosystem,” Trawínski said. DL News.
Trawínski said the move also reflects a broader industry recognition that centralized mechanisms may be needed to protect platforms and users.
However, Sky has no plans to completely remove the un-freezable version of its stablecoin.
In a post published in May on Sky’s governance forums, co-founder Christensen outlined a plan to transition DAI to PureDai, an immutable, un-freezable version of the stablecoin that will have no permanent connection to Sky.
“The original DAI will still exist,” Lewellen said, adding that it could still be a popular choice for those who prefer decentralized options without restrictions — including criminals.
There is a caveat, however: if Sky’s new USDS stablecoin becomes successful, users will migrate to it from DAI and its liquidity will decrease.
And with less DAI in circulation, bad actors will have a harder time using it.
Tim Craig is DL News DeFi correspondent based in Edinburgh. Feel free to share your tips with us at tim@dlnews.com.
