Reversible Token ERC-20R

The irreversibility of blockchain transactions is of crucial importance for both the decentralization it brings and the security of the network. However, erroneous fund transfers and subsequent disputes sometimes necessitate the cancellation of transactions. There was no clear solution to these problems. Circle and Stanford University announced the development of a new token standard that will preserve decentralization and allow transactions to be reversed.
Named ERC-20R by adding a letter to the token standards created on the Ethereum network, these token promises are quite significant. From a corporate perspective, at a time when non-crypto players are leaning towards tokenization, bringing a banking-like system to crypto will enhance this interaction. Most importantly, the reversibility of this token can minimize DeFi hacks like never before.

First, let’s look at how the token operates, and then we can discuss its potential impacts.

Pending Transaction

ERC-20R is a synthetic token, meaning it mimics the original asset. Initially, the user needs to convert the asset they want to transfer into ERC-20R for a reversible transaction to take place.
The logic behind reversibility is based on intentionally leaving the transaction incomplete. When Helen transfers the token she converted to ERC-20R, the transaction is split into two parts and is not fully finalized on the network. While one part goes to Sasha’s wallet, the other part still remains in Helen’s wallet.
During the 1-day reversal period, if Helen wishes to withdraw the money, she can, and the transaction is canceled. If no such request is made, the remaining part in Helen’s wallet is transferred to Sasha, and the transaction is fully finalized. Sasha can now freely convert the token back to ERC-20 and spend it.
The features of ERC-20R can be set by the user minting the token. For example, the reversal period can be set to as minimum as 1 block time, approximately 14 seconds, or even like 5–6 days if desired. Additionally, whether the initially transferred part to Sasha’s wallet during the reversal period is transferable or not can also be adjusted. For instance, before the reversal period ends, Sasha can transfer this initial part to someone else to settle a debt. That person can then send it to others. When the reversal period is completed, the part in Helen’s wallet goes to the wallet of the last recipient, completing the transaction.

Safer DeFi

Unfortunately, DeFi, being a highly experimental field, faces frequent hacking attempts. Even well-established platforms in the market are no longer surprising anyone when they occasionally fall victim to small or large-scale hacks.
Storing assets in the form of ERC-20R in the vaults of platforms will enable the possibility of reversing tokens in the event of a hack. Hack attempts generally consist of short-term, momentary attacks, so to speak, hit-and-run-like operations. Therefore, there is no example where a hacker held control of a platform for an extended period. As ERC-20R is customizable, the reversal period for these tokens can be 3–4 days instead of just 1 day, providing flexibility against any scenario. Also, as mentioned in the first part, it is possible to disallow transfers to a third wallet until this period expires.
Since hack attempts do not only target the assets in the vault, we cannot claim 100% security. However, at least a significant decrease in hacking attempts is foreseeable. Industry solutions to prevent vulnerabilities arising from code errors typically involve open-sourcing solutions, offering rewards (bounty) for community discoveries, or obtaining audit services from companies. Nevertheless, ongoing hacks have led to discussions in the U.S. about regulator code inspections, approval, and monitoring of code standards. If hack attempts decrease to negligible levels, there may be opportunities for the industry to escape from such regulatory burdens.

Token Economy

One of the most evident phenomena in the field of adaptation, especially in 2023, is the embrace of the tokenization trend. It was not surprising when the CEO of BlackRock expressed the expectation of tokenization becoming a new trend in a letter addressed to investors. Indeed, we observe tokenization initiatives, sometimes on a large scale and sometimes on a smaller scale, from major banks and financial institutions around the world.
Looking at these initiatives, we see a focus on products that can be developed. What I mean here is that people don’t complain about access to money and the convenience of spending. Contactless payments or ATMs for those who need cash are quite straightforward. Therefore, the promise of transforming a working system doesn’t hold much weight. However, tokenization brings significant advantages in areas such as financial products, collateral, international trade, and insurance. If these advantages remain limited to a single sector, they cannot fully realize their potential. Hence, there is a general purpose of tokenization to create interoperable systems. Therefore, we are rapidly moving towards a token economy. These tokens will most likely not be the ones we directly interact with, like Metamask, at the moment. Just as we continue to use services from mobile applications, we will know that tokens are working in the background without directly interacting with them.
ERC-20R could serve as an accelerator for collaborative efforts towards interoperability. As the DeFi sector integrates banking applications and banks gradually adapt to crypto solutions, the application of security standards in a conventional manner becomes crucial. In other words, users expect the service to be cheaper and faster while also retaining the ability to reverse transactions, similar to what they are accustomed to in traditional banking. Sacrificing comfort on one end for gains on the other does not lead to proper development. ERC-20R addresses this by combining the convenience familiar to banking with the crypto infrastructure.

While the allure of crypto might captivate us in our own world, it’s essential not to forget that the world outside of crypto still approaches this sector with caution and apprehension. This hesitation stems from the perception of the industry as a complex realm of technologies and concerns about hacking and fraudulent attempts. While ERC-20R may not contribute to advancements in complex technology, it can play a crucial role in improving the sector’s image regarding hacking and fraud prevention.