New Ethereum token standards for reversible transactions

You can’t cancel or reverse your cryptocurrency transaction once confirmed on the Ethereum blockchain. Why? Because Ethereum was designed to be immutable in the first place. 

What’s immutability?

Immutability means you can’t alter the information in a dataset. In the context of blockchain, it prevents a central authority, like a government or a company, from manipulating, replacing, or censoring the data. It is an approach to ensure decentralized operations. 

It also enables data integrity, a requirement for building efficient data storage platforms. Since data can’t be modified, new data is simply added to the existing ones, making the whole process faster than mutable databases. Furthermore, transaction histories are open, verifiable, and auditable because data is stored on the blockchain permanently. 

The downside is that it’s impossible to undo a transaction; for example, when you send your crypto to the wrong wallet address due to a typo or because you get trapped in a scam. In other words, your financial loss is also permanent. 

Are reversible transactions possible?

There’s no universal method yet. However, there’ve been proposals using different approaches. 

One approach is making initial coin offerings (ICOs) reversible, as with rICO, which was developed by Fabian Vogelsteller. rICO provides coin investors the option to reserve the coins for a period of time. If, during this time, buyers change their minds, they can return the reserved tokens to the smart contract. Reversible ICO is a powerful protection against scams that occur during project launches. However, it doesn’t work for reversing individual transactions.

New token standards

Another approach is extending the existing token standards so they can handle reversible transactions. 

Token standards are a set of rules, and they function like a blueprint that developers can use to develop new tokens, cryptocurrencies, or NFTs. In this way, tokens built by different projects become compatible with each other and with Ethereum wallets like MetaMask. 

The most widely used Ethereum token standards are ERC-20 and ERC-721. Developers use the former to create fungible tokens, i.e., cryptocurrencies, while they use the latter for building non-fungible tokens, i.e., NFTs. 

An example of a token-standard extension for irreversible transactions is ERC721 Refundable Standard which was introduced to enable refundable NFTs. It was developed by Elie Steinbock, Amir Hagafny, and the CryptoFighters team. As with rICO, this new standard requires NFT buyers to request refunds within a predefined timeframe. Considering how scam projects are rampant within the NFT industry, ERC721R is also a significant advancement. 

The Stanford proposal

Recently, researchers from Stanford University proposed a method for making reversible Ethereum transactions a reality. In the study, they explore how both ERC-20 and ERC-721 can be extended in terms of immutability by introducing reversible versions of the tokens, i.e., ERC-20R and ERC-721R. 

Also in this approach, transactions can be reversed only within a limited time window. During the dispute period, the specified transaction becomes “freezable” before it becomes irreversible again. 

Researchers implemented some prototypes of the proposed method, as well. It works in 5 steps:

• Victim requests freeze by providing evidence
• A decentralized set of judges accept or reject the request
• Execution of the freeze 
• Both sides present evidence to judges
• Judges decide whether to reverse the transaction or reject the reverse request

Are reversible tokens beneficial to the Ethereum ecosystem?

From a decentralization viewpoint, probably, not. For example, the Stanford proposal received much criticism, mainly because of the incorporation of judges into the process. As it’s difficult to form a decentralized judge system, the approach may conflict with the blockchain’s promise of permissionless operations. 

But for accelerating mainstream adoption, the answer is yes, because reversible tokens can help mitigate exploits and thefts. They can hinder rug pulls, and teams can use them to increase the accountability of their projects.