Sky’s USDS Stablecoin: Decentralization at Risk with New ‘Freeze Function’?

The world of decentralized finance (DeFi) is constantly evolving, and with it comes ongoing debates about security, control, and decentralization. Recently, Maker, now rebranded as Sky, has stirred up the crypto community with its new USDS stablecoin and a feature called the “freeze function.” What exactly is this freeze function, and why is it causing such a buzz? Let’s dive in.

What’s the Deal with Sky’s USDS and the Freeze Function?

Sky, formerly known as MakerDAO, is rolling out its new stablecoin, USDS. Unlike its predecessor, DAI, USDS introduces a “freeze function.” This function would allow the issuer to freeze the token, raising eyebrows and sparking concerns about the true decentralization of the project.

The Core Issue: Centralization vs. Control

• Decentralization Concerns: The ability to freeze tokens raises questions about whether USDS truly aligns with the principles of DeFi, which emphasizes decentralization and permissionless access.
• Community Skepticism: Crypto enthusiasts are wary of centralized control, fearing potential censorship or manipulation.

Monad marketer “Tunez” voiced a common concern, questioning whether the freeze function defeats the purpose of a decentralized project.

Sky’s Response: Addressing the Concerns

Rune Christensen, co-founder of Sky, clarified that the freeze function won’t be active at launch. Instead, it’s an upgradeable feature that governance can later decide to implement. The goal? To protect against risk factors, especially those related to real-world asset (RWA) collateral.

Key Points from Rune Christensen:

• No Freeze Function at Launch: USDS will initially launch without the freeze function enabled.
• Governance Control: Future implementation will be decided by governance, considering data and risk factors.
• RWA Collateral Protection: The freeze function aims to provide legal recourse against RWA collateral, ensuring stability.

Why the Freeze Function? The Role of Real-World Assets

To back USDS with assets like US Treasuries, a degree of regulatory compliance becomes necessary. Adam Cochran from Cinneamhain Ventures pointed out that incorporating US Treasuries requires adherence to certain rules, including the ability to freeze assets and block VPN jurisdictions.

The Trade-off: TradFi Benefits vs. DeFi Ideals

• US Treasury Backing: To gain the stability and yield benefits of US Treasuries, some level of TradFi (Traditional Finance) compliance is needed.
• Freeze Function & VPN Blocks: These measures are often required to comply with regulations when dealing with traditional financial assets.
• Industry Choice: The DeFi community faces a decision: embrace some TradFi rules for stability, or maintain strict decentralization.

DAI vs. USDS: What’s the Difference?

Christensen emphasized that DAI will continue to function as before, remaining an immutable smart contract. Upgrading to USDS is optional, and only USDS will have the freeze function. This distinction is crucial for users who prioritize immutability.

The Bigger Picture: Sky’s Endgame

Sky’s move appears to be part of its “Endgame” roadmap, which involves backing the stablecoin with real-world assets and scaling up its supply to compete with giants like Tether (USDT). Centralized stablecoins like USDT already possess freeze capabilities, which have been used to address security concerns.

Centralized Stablecoins and Freeze Functions: A Precedent

Tether (USDT), a leading centralized stablecoin, has demonstrated the use of its freeze function. In one instance, Tether froze $5.2 million worth of USDT linked to phishing scams, showcasing the potential utility of such a feature in preventing illicit activities.

In Conclusion: Navigating the Future of DeFi

The introduction of the freeze function in Sky’s USDS stablecoin highlights the ongoing balancing act between decentralization and regulatory compliance in the DeFi space. While concerns about centralization are valid, the need to incorporate real-world assets for stability and scalability introduces new complexities. As the industry evolves, it will be crucial for projects like Sky to engage with the community, address concerns, and ensure transparency in their decision-making processes.

Ultimately, the success of USDS will depend on whether it can strike the right balance between decentralization, stability, and regulatory compliance, earning the trust and adoption of the DeFi community.