Original article: Bankless
Compiled and edited by Yuliya, PANews
Is Ethereum, the leading smart contract platform, ready to handle trillions of RWAs? This isn't just a technical question; it concerns the future of its core value: decentralization. In this episode, Bankless invited two distinguished guests, Professor Austin Campbell of NYU's Stern School of Business and Professor Omid Malekan of Columbia University, to engage in a fascinating debate on this topic.
Interestingly, both guests are cryptocurrency advocates and old friends, but their views are diametrically opposed:
Austin believes that Ethereum's decentralized features, such as immutability and "code is law," are not advantages but rather "flaws" for RWAs, which need to interact with the real-world legal system. He believes that Ethereum is not architecturally suitable for RWAs.
Omid firmly believes that it is Ethereum's decentralization and neutrality that will attract the world's largest financial forces, institutions, and even sovereign nations to entrust their assets and liquidity to it. Without decentralization, we will only get another TradFi system.
At the heart of this debate lies the question of whether we should adapt blockchain to the rules of the real world, or whether we should uphold blockchain's neutrality and let the real world adapt to it. PANews has compiled this podcast episode's text.
When hackers come knocking, is neutrality a feature or a bug?
Bankless: Today's debate is titled "Is Ethereum Ready for RWAs?" Austin, the topic of this debate stems from a post you made on social media where you said, "I don't think Ethereum is ready for prime-time RWA issuance," and mentioned the Bybit hack as an example. Could you elaborate on what you meant by that?
Austin: When we talk about real-world assets (RWAs), we encounter a core contradiction: who are you actually accountable to?
Take Bitcoin as an example. It is a borderless, sovereignty-less, purely programmatic currency. It has no real physical form to obey the rules of a certain country. This is where its value lies.
But RWA is different. Imagine if we tokenized home ownership and your grandmother's property deed became an NFT. Then this NFT was stolen by hackers (such as North Korean hackers). In reality, the US government would never allow them to actually move in.
This demonstrates that real-world assets are always subject to legal and sovereign constraints, and there's a tension between the immutable nature of blockchains and the rules of the real world. If the ledger can't ultimately respond to reality, it will inevitably collapse in the long run. This is why I believe Ethereum's structural characteristics are unsuitable for RWAs.
Bankless: How does this relate to the Bybit hack you mentioned?
Austin: The Bybit incident is important for two reasons:
First, the Ethereum community currently lacks a mature mechanism to handle attacks on a level close to that of a nation-state. What if the target of this attack wasn't Bybit, but a stablecoin issuer like Tether? How would we respond?
Second, the key to this attack isn't the specific tokens stolen, but the sophistication of the attack—the hackers directly penetrated Bybit's internal systems. This leads me to consider: if Tether's smart contracts were ever compromised, the consequences would be far more severe than the Bybit incident, as it would implicate the entire DeFi ecosystem.
My core concern is that information security is never perfect. On a long enough timeline, a hack is only a matter of time. The question is how much damage it will cause and how you recover from it. If there were a sophisticated enough attacker in the world who could breach a company's internal security systems, I really want to know what the solution would be if Tether or USDC's smart contracts were stolen? How could you do that without breaking 95% of the deployed applications on Ethereum?
Omid: I think the Bybit hack is actually Ethereum's best advertisement. Despite the massive scale and complex origins of the attack, the Ethereum community's response was to remain neutral, with no human intervention. The only thing blockchains are good at is neutrality and predictability. In terms of simplicity, performance, cost, and bandwidth, they can't match Web2 and traditional finance. But they do one thing well: providing a network that always operates according to pre-set rules, regardless of any legal, moral, or political dictates imposed by outsiders.
As for Austin’s hypothesis that “Tether’s smart contract was hacked,” this is indeed a more serious risk, but my question is: since the risk exists, how do you think it should be solved?
Austin: I think there must be different “rules” for crypto-native assets like Bitcoin and Ethereum and RWAs.
ETH itself is designed not to respond to orders from federal judges. A judge in the Southern District of New York can issue an order requiring all ETH validators to do something, but the validators can completely ignore it.
But when it comes to stablecoins like Tether, the situation is different. Suppose one day Tether’s smart contract is compromised and a US court orders the freezing of related assets, Tether’s custodian bank will inevitably comply.
Because the legal structures behind these two asset classes are fundamentally different, the network may need the ability to roll back or handle events like Tether hacks, capabilities that aren't necessary for ETH itself. Many would argue that Tether could simply abandon the old contract and deploy a new one. However, I would point out that this would destroy nearly every DeFi protocol that integrates Tether, such as Uniswap, Aave, and Compound. Their pools are immutable, and suddenly, a core asset within them becomes worthless.
Should we introduce new vulnerabilities for security?
Austin: So my point is that Ethereum may need to introduce some mechanism at the network level to deal with the risk of RWA. This does not necessarily have to be directly enforced by the validators, but the validators need to enforce the requirement: "Don't put a time bomb on our chain." There are many solutions, such as:
Deploy RWA on a permissioned validator network (such as an Avalanche subnet) so that the validators can collectively intervene if something goes wrong.
Alternatively, a “circuit breaker” can be built into the smart contract design. When a trusted oracle triggers it, the relevant contract is frozen and the user can only withdraw assets.
Otherwise, once the Tether contract is attacked and abandoned, almost all DeFi protocols that rely on USDT will be destroyed in a chain reaction, which is a systemic risk that Ethereum cannot bear.
Bankless: Omid, what do you think of solutions like the “kill switch” or “permission verifier” that Austin proposed?
Omid: Introducing backdoor mechanisms into DeFi protocols can pose greater risks. The Ronin hack is a vivid example of this. A permissioned validator network controlled by a multi-sig protocol was breached by the North Korean Lazarus group, resulting in hundreds of millions of dollars in losses. This type of social engineering attack is much easier when you know the identity of the validators, their employees, and where their computers are located.
Although DeFi protocols can consider fail-safe mechanisms to deal with extreme situations, it is not worth sacrificing the deterministic results of the vast majority of users in response to black swan events.
In the long run, protocols with “backdoors” may attract less capital as users worry that the backdoors can be exploited by hackers or weaponized to compromise their transactions.
Bankless: Omid, you seem adamantly against allowing Ethereum validators to step in and roll back transactions. Why do you think this is a bad idea?
Omid: This mechanism may sound good in theory, but there are huge problems in practice. This will introduce a completely new governance mechanism, and its complexity may be beyond imagination.
The governance of decentralized systems is already highly chaotic and prone to failure, and the addition of new mechanisms will hold the fate of entire chains, potentially involving vast sums of money. Who decides when to act? Will it be through voting or on-chain or off-chain coordination?
Bankless: Austin, perhaps your point is more that if a chain is completely immutable, permissionless, and decentralized, then it might not be the right place for RWAs. This is more like Bitcoin's approach, which only handles Bitcoin transfers and everything else is off-chain. Ethereum has a mix of tokens. Perhaps you're simply saying that RWAs don't belong on Ethereum?
Austin: The Ethereum ecosystem has some ideological contradictions when it comes to handling real-world assets, while Bitcoin is relatively straightforward. For tokenized RWAs, compliance with the real-world legal system isn't a compromise; it's a core feature of the product. For example, for a stablecoin, if its reserves are US Treasuries, the operator must prioritize responding to the requests of US lawmakers, regulators, and judicial officials. The real-world legal system has enforceable power over assets, such as through sanctions laws or confiscation by the Office of Foreign Assets Control (OFAC).
If you want to tokenize RWA on the blockchain, you must establish multiple redundancy mechanisms to ensure that the chain can respond to relevant legal frameworks. Otherwise, you may face the risk of assets being invalidated due to legal procedures. If this problem is not resolved, the assets may eventually become unusable due to the intervention of real-world laws.
A neutral “world computer” or a divisive “digital United Nations”?
Bankless: Omid, you mentioned that Ethereum's neutrality may be its greatest advantage. Can you explain in detail why neutrality is the "killer application" for RWA on-chain?
Omid: The neutrality of blockchain could be key to the coexistence and interaction of global assets. If an asset regulated by the United States, an asset custodied by London, and an asset controlled by China can coexist on a neutral blockchain, this will provide unique appeal to global users.
US users might choose a blockchain because it's not controlled by China, while Chinese users might do the same because it's not influenced by the US. Meanwhile, a tokenized gold issuer in London might see a blockchain with significant USD and RMB liquidity as an ideal custodial platform. This neutrality can attract more users and assets because it treats all participants equally and is free from political interference.
When the real-world legal system attempts to intervene in on-chain transactions, neutrality will become the core competitiveness of blockchain success, and any blockchain with political or censorship mechanisms may lose its advantage.
Austin: The hypothetical world of completely permissionless transactions and nation-state interference does not exist.
London and the US control how gold-backed tokens and US stablecoins operate, respectively, as freezing reserves and issuing entities provides control over the tokens. The ability of governments to intervene can destroy a chain's value proposition. For example, if the US bans certain transactions and seizes the associated funds, the tokens on that chain will become invalid if the blockchain fails to reflect this reality.
Decentralization is an advantage when trust is lacking and neutrality is required. However, when the underlying assets themselves are not decentralized, this characteristic becomes a flaw in the system. Forcing the concept of "decentralization" that does not interact with reality into the system is like inserting a grenade that can explode at any time.
Bankless: Austin, the solution you just described—having a token declare which jurisdiction it is accountable to when it is deployed—sounds a lot like the Swift system we already have in traditional finance.
Austin: You could say that, but I believe blockchain has a significant advantage over traditional finance that's often underestimated. I believe blockchain's open access and composability are perhaps even more important than decentralization. Traditional financial systems, like the Federal Reserve System, have high barriers to entry and are fraught with corruption, political infighting, and other issues, resembling a private club. Blockchain, on the other hand, is more like a public park, allowing everyone to participate by default and restricting behavior only when necessary. This paradigm shift is a significant advantage of blockchain over traditional finance. Furthermore, blockchain's composability addresses the fragmentation of the current financial system, enabling users around the world to transact in innovative ways.
The uniqueness of DeFi protocols lies not only in their independence but also in their ability to be combined like building blocks to create new financial applications. While decentralization has some shortcomings in terms of legal compliance, blockchain has broken down barriers to entry for traditional financial instruments, providing unprecedented opportunities for users around the world.
Omid: Integrating the permissioning rights of asset issuers into the blockchain's consensus layer undermines the composability of the entire system and increases developer risk. If validators can vote on the eligibility of a stablecoin to issue, it will be difficult for developers to build a long-term financial ecosystem around it, as this eligibility could be revoked at any time.
In contrast, current centralized institutions such as DTCC (Depository Trust & Clearing Corporation) have solved the problem of licensed issuance well, but these consortium-style infrastructures may eventually use their own advantages to exploit members.
Bitcoin's experience has revealed market preferences: when governments attempt to stifle it, they ultimately only harm their own people. Ultimately, even governments are beginning to favor decentralization. The same is true for stablecoins, with governments ultimately passing legislation (such as the US Genius Act) to recognize the existence of the semi-permissionless dollar. All of this demonstrates that the decentralized nature of cryptocurrency offers a better solution, and market preferences are gradually shifting toward neutrality and decentralization.
Final Statement
Bankless: Both of you agree that decentralization is crucial for store of value and open finance. However, your views diverge on the RWA use case. Omid, Austin, please make your final remarks.
Omid: The centralizing elements of any on-chain solution are like the exhaust vents on the Death Star in Star Wars. Eventually, the resistance will find and exploit these weaknesses, not because they are easy to find, but because the incentives are strong enough. If the future of semi-permissioned or consortium chains becomes a reality, these systems will eventually collapse due to their own flaws.
Although decentralization may not be the most perfect option, it is the relatively best solution among all the options tried, so it will eventually become the default option.
Austin: The real value of blockchain technology lies in providing humans with an "exit option". For example, decentralized value storage systems such as Bitcoin and Ethereum have become the bottom line of financial behavior, requiring other systems to exceed these bottom lines to become more attractive.
The core contributions of blockchain are twofold: first, it raises the minimum standards of global financial behavior, which is of great significance to improving human rights; second, it promotes changes in the way of cooperation and sets higher standards for many things that may become more centralized over time.
Preferences vary significantly across transaction scenarios. For example, small purchases often require a higher tolerance for errors, while large financial transactions require greater speed, control, and error reversal capabilities. Blockchain is triggering a governance revolution with profound implications for the global financial system.
