Saturday, February 4, 2023

NEM’s Anti-Theft Tagging Feature Could Cripple XEM Fungibility

NEM’s Anti-Theft Tagging Feature Could Cripple XEM Fungibility

NEM developers have created an automated token tagging and tainting feature to thwart a repeat of the hack where ~$500 million USD worth of XEM, NEM’s native currency, was stolen from hot wallets of Coincheck, a major Japanese digital currency exchange. But critics say the move will destroy the token’s fungibility, disrupting the network’s economic usefulness.

Also read: Yikes: Bitcoin Trader in Britain Held at Gunpoint, Bitcoin Stolen

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NEM’s solution was to render the hacker’s stolen coins useless — using off-chain smart logic united with on chain assets.

A NEM spokesperson tweeted “Hack update: NEM is creating an automated tagging system that will be ready in 24-48 hours. This automated system will follow the money and tag any account that receives tainted money. NEM has already shown exchanges how to check if an account has been tagged. So the good news is that the money that was hacked via exchanges can’t leave,”

NEM Foundation Plays God

However, crypto experts fear that the new automated tagging tactic entirely flouts a fundamental goal of cryptocurrencies — being decentralized. The new tagging system may have its pros as a weapon against hacks, but on a long run, it could entirely remove the fungibility of the token.

That means it would restrict users’ ability to freely exchange coins, render some coins useless, or lead to differing values for otherwise identical tokens.

In addition, such a “tagging” and “tainting” feature could be misused by the third party. The whole point of a decentralized digital currency is for no-one to have absolute power over it. The new tactic will empower the NEM Foundation and exchanges to differentiate between tagged and untagged tokens, plus decide which tokens to accept and which not to.

For example, exchanges could profess that some coins are illegal, even if they not. Imagine if dollar bills that had once been involved in a crime were never accepted in any store, and you get the picture.

NEM – Not Really Decentralized Then?

Tracking transactions is also possible on the Bitcoin blockchain. Maybe not at this scale and speed, but it is possible. However, there is no singular governance authority that controls Bitcoin in this manner, which is why bitcoins can still be exchanged freely if a similar hack occurred.

NEM logoBut this is not in the case with XEM, where NEM decides what’s acceptable and what’s not. The recent move from the NEM Foundation indicates that it has complete control over the cryptocurrency, therefore making it a somewhat centralized currency.

In cases of a hack or major issue, other blockchains — most infamously Ethereum — chose to hard fork, effectively turning back time and erasing the hack entirely from history.

Ethereum performed its hard fork after the DAO hack. While investors who lost money were pleased with the outcome, many said it destroyed much the trust in Ethereum’s blockchain and wondered what future conditions could provoke a repeat.

However, NEM representatives clearly pointed out that their own community is completely against a hard fork. A hard fork would recover users and exchanges which lost XEM from the major hack. Developers also refused a hard fork, as the breach did not occur it blockchain, but rather was due to the weak security system at Coincheck.

In the future, if tagged tokens are sold to unobservant users who then find them to be worthless, the system’s unreliability will only increase.

Is tagging and tainting a right move or it could remove fungibility of XEM? Tell us what you think.

Images via NEM, Pixabay

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