Tether’s $31 Million Theft Ignites Criticism on Centralized Blockchains

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Tether’s $31 Million Theft Ignites Criticism on Centralized Blockchains

The treasury wallet of Tether (USDT), the cryptocurrency that is pegged to the value of the US dollar through an inflationary monetary policy, was hacked earlier this week. Nearly $31 million worth of the cryptocurrency was stolen, and consequently, the Tether development team suspended the account possessing the stolen funds to disable it from being sent across the network.

In an announcement entitled “Tether Critical Announcement,” the Tether development team stated:

“Yesterday, we discovered that funds were improperly removed from the Tether treasury wallet through malicious action by an external attacker. $30,950,010 USDT was removed from the Tether Treasury wallet on November 19, 2017, and sent to an unauthorized bitcoin address. As Tether is the issuer of the USDT managed asset, we will not redeem any of the stolen tokens, and we are in the process of attempting token recovery to prevent them from entering the broader ecosystem.”

Experts, analysts, and researchers in the bitcoin and cryptocurrency community heavily criticized the Tether development team’s approach to the hack. Most notably, Bitfinex’ed, Bitcoin Core developer Peter Todd and Cornell professor Emin Gün Sirer condemned Tether and its centralized structure that allowed the development team to freeze or disable funds stolen from the Tether treasury wallet.

Todd wrote:

“Tether is inherently a centralized system, which happens to use a decentralized system for transparent, publicly auditable accounting. There is nothing inherently wrong with Tether changing the accounting system used to track Tether to respond to a theft. This is not the DAO.”

The statement of Todd was released subsequent to the execution of a private hard fork to recover the funds stolen from the hacking attack. In the case of the DAO for instance, the Ethereum Foundation and the Ethereum open-source development community had public consensus to execute a hard fork and obtain the funds from the DAO. Community members that did not agree with the Ethereum Foundation’s approach to the DAO created Ethereum Classic, in protest of the DAO hard fork.

However, the Tether hard fork did not involve any sort of public community consensus or rigorous mechanism that provided the Tether development with authority to censor or manipulate transactions and accounts on the Tether network.

Emin Gün Sirer, a well-known critic within the cryptocurrency sector, added:

“One of the many surprising things about Tether’s getting hacked and unhacked was the level of control they exert over this blockchain. It’s hard to distinguish it from a regular database under sole custody.”

The centralized approach of the Tether development team to revoke the theft of Tether Treasury’s funds triggered a series of discussions and debates on whether Tether can be justified and described as a public blockchain network since a central entity has control over the network that could become a major in the future.

One major advantage of a public blockchain network such as Bitcoin or Ethereum is that transactions on the networks are censorship resistant. Law enforcement or authorities cannot possibly assert dominance over distributed networks by altering or manipulating transactions because they exist on peer-to-peer protocols. However, with Tether, because a certain group of people have the power to alter the network, it poses a threat in various ways.

Joseph Young

Joseph is a bitcoin enthusiast, financial consultant, web developer writer based in Hong Kong. He has worked with hotels and tech firms in Korea, the Philippines, Hong Kong and Singapore as a front-end developer and has collaborated with venture capital firms to explore bitcoin and virtual reality-focused startups in South East Asia.