DeFi can freeze stolen funds, but not everyone agrees it should

Decentralized finance (DeFi) protocols are stepping in to freeze stolen funds while centralized issuers face criticism for holding back.

Circle’s explanation did not cut it for security experts demanding answers. Source: ZachXBT

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Bilotta said waiting for formal legal orders in cases with clear, onchain evidence of an exploit is a “failure of responsibility.”

Who decides what counts as “extreme”

Large-scale exploits, including those linked to North Korean actors, have pushed the industry into situations most would consider extreme, where hundreds of millions can be drained and laundered in real time.

Such cases raise the question of who defines what qualifies as “extreme” and when intervention is justified.

“This is the question the industry has been ducking the longest,” said Wish Wu, CEO of institution-focused layer-1 Pharos.

“In practice, ‘extreme’ is too often defined after the fact by whoever holds the keys, which is exactly the failure mode decentralization was meant to avoid,” he added.

Wu said the more credible approach is to define those conditions in advance and encode them into governance, even if that means accepting that some edge cases fall outside those rules.

“Can a small, identifiable group move user funds before users have a fair chance to exit?” Wu asked.

“If the answer is yes, then whatever the marketing says, the system is custodial in substance. If the answer is no, only then are we in an honest conversation about which governance and safety tradeoffs make sense for different use cases.”

Below that line, decentralization loses its substantive meaning, he added.

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