The Challenges of Decentralisation: Censorship and Regulation of Crypto Projects
Few crypto projects can afford to operate under complete decentralisation, one of its key features being resistance to censorship. Every community is inevitably guided by its own rules, principles, and the legal framework of the state in which it operates.
As a result, community consensus and the personal decisions of network participants will continue to play a central role for the foreseeable future. In this article, let’s explore the arguments presented by supporters and opponents of censoring cryptocurrency transactions.
Blockchain-Level Censorship
A striking example of blockchain censorship is the activity of Ethereum validators. In 2022, when the U.S. Department of the Treasury sanctioned Ethereum addresses associated with the Tornado Cash protocol, some network participants chose to stop processing transactions linked to the mixer. These decisions were personal choices unrelated to the Ethereum protocol itself. Still, they led the Federal Reserve Bank of New York to conclude that Vitalik Buterin’s project is surprisingly vulnerable to censorship.
While blockchain can function impartially, some of its participants opt to follow sanctions. Validators often use specialised intermediary services that offer an advantageous order of transactions in exchange for a small fee for “approving” a block. This practice is known as Maximal Extractable Value (MEV).
Social Consensus in Crypto Ecosystems
The ecosystem of any major crypto project consists of various user groups, often with opposing goals and values. Yet, they all operate within the identical blockchain, protocol, or smart contract.
Take Ethereum, for example — some of its infrastructure participants chose to enforce censorship even though the network doesn’t mandate it. This essentially represents a form of social consensus regarding sanctions. As of the evening of September 17, 2024, 56% of Ethereum transaction blocks were subject to censorship within just one day.
The Power of Community Agreements
Every wallet holder, trader, exchange, project, investor, miner, validator, or liquidity provider operates in the same environment in decentralised financial applications. The technical structure of the project matters less — what truly governs the space is the collective agreement among participants. If, at some point, the community decides that Ethereum’s censorship justifies moving to another blockchain, validators are likely to react accordingly. Losing revenue, many of them may choose to bypass sanctions in favour of meeting user demand.
Although some still believe that developers, significant investors, miners, and validators hold more power than average users and can decide which changes to implement, this isn’t always the case. Ultimately, all rules are determined solely by what buyers and sellers accept as legitimate assets worth their time and money.
MakerDAO Case Study
A recent example of a community willing to embrace censorship at the expense of decentralisation is MakerDAO, the issuer of the most significant algorithmic stablecoin, DAI. In late August 2024, MakerDAO announced a rebranding and the issuance of new coins to replace the old ones. Starting September 18, users can exchange one DAI for one USDS stablecoin and one MKR governance token for 24,000 SKY. The new stablecoin will feature a freeze function on user addresses, similar to that found in centralised stablecoins like USDT and USDC. Although this wasn’t initially mentioned in the public announcement, the topic gained traction, forcing MakerDAO founder Rune Christensen to reveal more details about the plan.
He explained that stablecoins face a unique trilemma: it’s not feasible to simultaneously achieve a dollar peg, decentralisation, and large-scale scalability. To accomplish this, MakerDAO must comply with regulatory requirements, hence introducing the freeze function in USDS tokens. This highlights the difficulty of scaling projects without adhering to regulatory standards. Moreover, Christensen believes this approach enables the creation of new products that generate passive income, primarily through the purchase of government bonds. MakerDAO must enter the U.S. government debt market to unlock additional earning opportunities, just like “traditional” stablecoins such as USDT, which purchase U.S. government securities in exchange for regulatory compliance. Ultimately, the plan reveals that DAI will abandon its dollar peg in favour of decentralisation, while USDS sacrifices decentralisation to maintain its dollar peg.
Conclusion
The growth of the crypto market has demonstrated that true decentralisation can only be achieved by the most significant projects in terms of capitalisation and active participation. Smaller networks face inherent risks due to their limited communities, which are more vulnerable to external influence, regardless of how advanced their technology may be.
However, as projects scale to significant sizes, they often encounter resistance from regulatory authorities — something not all communities are prepared to handle. For many, decentralisation is eithern’t a priority or necessary at all.
About Concorpad
Concorpad stands at the forefront as an innovative launchpad platform operating on the robust Concordium blockchain, poised to revolutionise the IDO landscape for inventive ventures. Our core mission is firmly rooted in bridging the divide between visionary concepts and the market, providing an all-encompassing framework from initiating token launch to its seamless listing. At Concorpad, our unwavering dedication revolves around cultivating growth and propelling innovation within the expansive realm of the blockchain ecosystem.
