The irreversibility of blockchain transactions is often touted as proof of the security of cryptocurrencies. Because a the transaction cannot be reversed, there is no way for fraudsters to initiate a chargeback after transferring funds to purchase a product. It provides the ultimate level of protection for sellers – especially those who may have been burned in the past using a third-party service like PayPal, where chargebacks are not only common, but very difficult to dispute in the event of fraud.
There is an argument that blockchain’s irreversibility is one of the reasons why it is such a secure technology. However, there are drawbacks to this unique feature of blockchain. After all, blockchain users are only human, and mistakes are often made. The problem is that blockchain wallet addresses are essentially a long string of random numbers and letters, and it’s very easy to make mistakes when entering them manually. If the address is wrong and the transaction is confirmed, those funds will either end up in the wrong wallet or be lost in the ether forever, never to be seen again.
Another problem stems from the complexity of DeFi, where users will often conduct a series of cross-transactions. For example, they could borrow from a protocol on one chain and then bridge these tokens to another chain before depositing them into a liquidity pool. This is a three-step transaction that traders can perform to take advantage of arbitrage opportunities, but such transactions are fraught with risk should any of the steps in the process fail.
Why can’t Blockchain transactions be reversed?
The finality of the transaction is key design feature blockchain which is necessary due to its decentralized nature. Unlike a bank transfer, which is performed by a trusted third party, blockchain transactions are processed by validators when a consensus is reached between the various nodes that make up the network. Because blockchain records are stored on multiple nodes, the distributed ledger is immutable, meaning it cannot be changed by any node or user. If someone tried to modify the transaction, the rest of the network would know about it and reject the modification.
Blockchains are designed this way for security reasons, as it eliminates a problem known as “double consumption“, where the user can try to cheat and use the same means to perform multiple transactions.
So, because of the way blockchains are decentralized, there is no way to reverse a transaction. The only way funds can be returned is if the person who received them chooses to return them. This can be problematic because if funds are sent to a complete stranger, that person may be tempted to keep them because they won’t face a problem for it.
Problems caused by irreversible transactions
While many people see blockchain’s irreversibility as a good thing, it can also cause major problems when mistakes are made. There is a strong argument to be made that if cryptocurrency is to replace fiat as the main form of payment, then people will need a way to reverse transactions when funds are sent to the wrong address.
Although most errors are eliminated by simply copying and pasting addresses or scanning a QR code, these methods are not completely foolproof. It is possible, for example, to accidentally change the address after scanning. Alternatively, the sender may enter the wrong amount of coins to send. This happens more often than people realize because people often value things in US dollars or other fiat currency and then send the equivalent amount in cryptocurrency. To send USD 50 in BTC, the user will need to transfer 0.0027 BTC at the current exchange rate. But it’s too easy to accidentally send 0.027 BTC ($500) instead.
However, it’s not just the errors that are worrying. Another big problem is wallet hacking. In traditional banking, customers are assured that if their bank account is hacked and someone transfers money from their account, the bank will eventually refund the lost amount. This will not happen with blockchain transactions, as there is no centralized body that can provide refunds. Security is the sole responsibility of individual users, so if your wallet is somehow compromised, you can almost certainly say goodbye to all the funds in it forever.
Why is a safety net needed?
Clearly, many people can benefit from being able to reverse blockchain transactions. However, the difficulty is to enable this in a way that does not compromise the security of the blockchain. If someone can send payment for goods or services and then reverse that transaction after the product has been delivered, crypto will lose all credibility and no one will use it anymore.
It’s a tough problem to solve, but there are some very bright minds who have already come up with a solution. A good example is t3rn protocolwhich has developed a platform that executes smart contracts with a built-in failsafe mechanism to ensure that complex transactions are either processed correctly, or completely reversed in case of any problems.
T3rn provides a good illustration of how its security mechanism works in this case blog post. Imagine a user planning a five-step transaction that involves bridging tokens from Ethereum to Polkadot and then to Moonbeam, with various additional exchanges and deposits along the way. These types of transactions are usually done by DeFi merchants, but can cause problems if the user does not have enough coins in their balance to pay the gas fees for each transaction. If they run out of fuel in the third or fourth step, the tokens will stay on that step, causing huge headaches for the trader. They will almost certainly miss out on any arbitrage opportunities they had hoped to exploit.
With t3rn this is not a problem. Its unique fail-safe mechanism involves placing the funds involved in each step of the transaction in escrow. This way, they will only be released when each step of the transaction is successfully completed. If any of the steps are not completed, t3rn will simply cancel the transaction and all previous steps will be rolled back. As you can see in the example above, Bob will simply return all his original ETH tokens to his wallet, without losing his fuel allowance.
The great thing about t3rn is that it allows users to put together complex transactions through a simple user interface, where each step is laid out in a chronological manner. The protocol also supports multiple wallets, including MetaMask, Ambire wallet and others.
Paving the way for greater adoption
The blockchain reversibility enabled by t3rn could prove to be transformational for the crypto industry. It enables users to better protect their digital assets by introducing a security mechanism for every single transaction they ever make. If someone accidentally sends $500 worth of tokens instead of just $50, they now have a way to reverse that transaction and correct the mistake, without relying on the honesty of the person who received the funds.
Such an ability is an essential safeguard that will benefit ordinary users and DeFi traders alike, and perhaps create greater confidence in cryptocurrencies in general. While blockchain transaction finality cannot, and should not, be sacrificed, people still need a way to avoid punishment for honest mistakes. By providing that capability, t3rn could go some way to tapping into the next generation of more cautious crypto users who need some sort of safety net.