Is Gemini Dollar a Threat to Decentralization?

One of the things that made cryptocurrencies popular today is its volatility. From just $1,000 at the beginning of 2017, it was able to reach near $20K by mid-December. And for those who are looking for quick profits, Bitcoin along with other cryptocurrencies have become an ideal investment despite the risk of losing a great amount of the money they invested.

For this same reason, many retailers haven’t yet adopted cryptocurrencies. There is the possibility of even losing so much money even in just a short period of time. To give you a perspective, Ethereum, for instance, has lost 45% in just 30 days.

A Stable Gemini Dollar

And for this reason, there have been attempts to have a stablecoin. Tether is still one of the most popular stablecoins today. However, there have been questions whether or not it is really backed by enough fiat.

Recently, Cameron and Tyler Winklevoss announced the Gemini Dollar. It is a Gemini cryptocurrency exchange USD-pegged cryptocurrency that aims to bring crypto use to the mainstream. However, you will have to look closer into the detail to see that it isn’t really a perfect option for those who believe in decentralization.

Gemini Controls Accounts

Blockchain researcher Alex Lebed took a closer look at the code of the Gemini dollar smart contract. Though it has the ethos of bringing stability towards decentralized cryptos, GUSD has a provision that allows its custodian to freeze accounts. In this case, Gemini has the ability to freeze the accounts.

Lebed noted that the Gemini Dollar makes use of ERC20Proxy contract. This gives Gemini the ability to upgrade the contract once every 48 hours. This means that Gemini has the power to make tokens non-transferable.

Is this exactly surprising? In reality, the Gemini USD has been described as the first “trusted regulated digital representation of the US dollar”. It has been argued in the Gemini Dollar Whitepaper that a cryptocurrency that is pegged to a physical asset needs a centralized location in order to establish trust.

According to its whitepaper: “Desirable outcomes in a system that relies (at least in part) on trust requires oversight. In the context of a stablecoin, we submit that the issuer must be licensed and subject to regulatory supervision. From this, transparency and examination become requirements of the system, ensuring its integrity and engendering market confidence…. Gemini operates under the direct supervision and regulatory authority of the New York State Department of Financial Services and is subject to the New York Banking Law and other applicable U.S. laws and regulations”.

Since it is regulated, the New York Department of Financial Services mentioned that the agency requires Gemini to “prevent and respond to any potential or actual wrongful use of stablecoin, including but not limited to its use in illegal activity, market manipulation, or other similar misconduct”.

Is This a Good Deal?

Is this a huge tradeoff for stability? Though it helps solve concerns regarding volatility, centralization is a serious issue for the industry. And also, let’s not forget that Tether’s address was hacked last year and Tether prevented the attackers from spending the funds by blacklisting more than $30 million in stolen funds.