Sky’s New Stablecoin $USDS Freeze Function Causes Backlash; Is the Concern Warranted?

• Sky relaunched its Stably USD Classic ($USDS) stablecoin, adding the possibility of implementing a freeze function in future upgrades.
• The upgrade raised centralization concerns among investors and industry players.
• However, Sky representatives explained that the freeze function is necessary to comply with regulations and ensure the stability of the stablecoin.

Decentralized finance firm Sky, formerly Maker DAO, had recently upgraded its $USDS stablecoin, adding a freeze function' that allows the issuer to halt trading and redemptions.

The upgrade caused a backlash from the crypto community members, including Monad marketer Tunez, who notes that it defeated the project's purpose.

Let's unpack the $USDS upgrade to see whether the concern is warranted.

Sky's $USDS Relaunch Sparks Controversy

Sky announced it would relaunch its $USDS stablecoin in October 2023 after its regulated custodian Prime Trust suspended users' deposits and withdrawals in June 2023. Two months later, Prime Trust filed for bankruptcy.

Following the incident, Sky integrated with a new regulated partner, Bridge, and renamed old $USDS tokens as $USDSC. The new $USDS token retained its multi-chain functionality, US dollar peg, and name.

However, some X users noticed the new stablecoin has a freeze feature that allows Sky to halt its transactions. Monad marketer Tunez' insists it defeats the project's purpose and raises centralization concerns.

Yesterday, Sky co-founder Rune Christensen clarified that $USDS won't have a freeze function at launch. However, its implementation is possible in future upgrades.

A Trade-Off for US Treasury BackingIn May, Rune explained that the freeze function is necessary for Sky to operate in regions with clear laws regarding enforcing RWA (real-world asset) collateral.

Adam Cochran, at Sky's partner Cinneamhain Ventures, notes the freeze function is a requisite for backing $USDS by US Treasuries.

The reality is, if you want T-bill yield backing, even by secondary treasury deals, you're going to have a freeze function and a VPN jurisdiction blocker.Adam Cochran

He further adds that the freeze function is a trade-off Sky had to make to reap the benefits of the US traditional financial system.

Moreover, upgrading from $USDSC to $USDS is optional; only the new token will have a freeze function.

It's worth noting that other major stablecoins like Tether ($USDT) also have a freeze function. In May, Tether locked $5.2M worth of $USDT to aid authorities in recovering funds stolen through phishing scams.

Closing Remarks

The recent upgrade to Sky's $USDS stablecoin, which added a freeze function, has sparked controversy within the crypto community. Critics argue that this feature undermines the decentralized nature of the project.

However, commentaries from the company's representatives clarified the confusion. Tether's practice shows that the collaboration between stablecoin issuers and government institutions does more good than harm, at least for now.

References

• Reconciling the two opposing paths for Decentralized Stablecoins (Maker DAO)
• Stably's Back - Tell a Friend! (Stably)
• Rune (X)
• Adam Cochran (X)
• Tunez (X)

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