How Can Cryptocurrencies Be Frozen on a Blockchain?

How Can Cryptocurrencies Be Frozen on a Blockchain?

Indeed, you might be surprised to find out that not only is it technically feasible to freeze assets held in an external wallet, but also relatively common. But, unless you’re involved in major criminal activity, the odds of it happening to you remain low.

Despite this, it is advisable to familiarize yourself with this relatively unknown phenomenon. Here at Empirex Capital, we explain this myth that cryptocurrencies cannot be frozen on-chain.

How Does Freezing Funds on Blockchain Work?

Before we get into how developers are able to freeze assets within a wallet, we first need a short primer on how tokens work.

Contrary to how it might feel when interacting with them, ERC-20 tokens are simply a reference to a database that keeps track of which address holds what number of units of said token. The token contract is responsible for managing this database. When tokens are transferred from one person to another, the contract is responsible for changing the number of tokens associated with each address — deducting the sum from one address and adding it to another to ensure the supply remains constant.

Because this token contract is usually the only smart contract with the authority to modify the token holder database, it can be used to block access to funds, confiscate tokens or, in some cases, even burn the tokens entirely.

If an address is blacklisted by the smart contract, then it may be unable to buy (or receive) and sell (or send) the token. Only an admin address can update the smart contract with a blacklisted address.

Why Does a Funds Freeze Happen?

As you can imagine, these features can be used to ward off attacks, confiscate illicit funds, or misuse if someone gains admin control over a smart contract.

Though rare, the vast majority of blacklisting events come after an illicit activity is detected in the smart contract — such as if an attacker uses an inflation bug to mint and transfer tokens to an address they control, or the police requests that assets are frozen pending investigation.

Tether (USDT) is one such token with these capabilities. The USDT smart contract has the capability of freezing and reissuing USDT.

Created on 21st Sep 2022