As an analyst with over a decade of experience in the cryptocurrency industry, I have seen my fair share of controversies and concerns surrounding digital assets. The recent debate surrounding Sky’s reliance on an externally owned account (EOA) to manage its substantial USD Coin reserves within the lite peg stability module (PSM) is no exception.
Previously known as MakerDAO, Sky now finds itself under scrutiny due to its use of an external account to control over $756 million worth of USD Coins stored within its Light Peg Stability Module (PSM).
It’s been pointed out by one of the users that a significant part of the protocol’s reserves, worth approximately 756 million US Dollars in USD Coin, is being managed by an Externally Owned Account (EOA).
As a researcher, I’ve come across the viewpoint that the custodianship model might unintentionally expose these funds to potential risks such as exploitation or misuse from within.
Following its brand change to Sky and questions about whether they can add a freeze feature later on, there’s a possibility that mishandling or security issues with these Ethereum-based fund managers might harm the protocol’s standing and make users less confident in it.
What is the lite PSM?
The lite PSM is a mechanism designed to assist Sky in maintaining the peg of its stablecoin to the United States dollar by allowing users to swap the stablecoin for USDC at a fixed rate.
According to the migration strategy, Sky is going to move funds from their older Performance Sharing Mechanism (PSM) to the lightweight PSM in three separate stages, starting off by transferring an initial amount of $20 million.
Nevertheless, it’s been suggested that the Lite PSM funds are managed by an EOA (External Owned Account), according to a post made by X user on social media and a discussion on the lite PSM forum page. This claim has sparked worries about responsibility and safety.
Runo Christensen, one of the founders of Sky, communicated to CryptoMoon that “during the setup process with Coinbase Custody, the private keys essential for recreating the multi-party computation account were deliberately destroyed.
EOA-based custodianship criticism
A Ethereum Omitted Address (EOA) is simply an Ethereum wallet that’s managed with a private key, unlike a smart contract, which follows pre-set security guidelines autonomously without any outside meddling.
As an analyst, I’ve come across the perspective that custodianship based on Externally Owned Accounts (EOAs) faces criticisms for its perceived deficiencies in transparency and security. This is primarily due to the absence of advanced features such as multi-signature authentication or time-locked transfers within EOAs, which are often present in more secure systems.
Employing this fund management approach may put the $756 million reserve at risk due to possible private key breaches or harmful activities, especially if there are no mechanisms in place to limit the transfer of funds.
Christensen’s explanation that the private keys essential for “reviving the MPC account” have been eradicated eases this worry as it removes the possibility of a breached private key posing a risk.
Yet, while Sky’s co-founder’s observation provides valuable input, it doesn’t completely alleviate worries about ownership of the wallet, the process by which transactions are validated, and if governance choices can mandate financial management directives.
CryptoMoon asked Christensen about these points but received no further response by publication.
Sky pushes for deflationary tokenomics
Earlier, Christensen mentioned that he was working on a plan to stop the issuance of new tokens and reduce the overall token count within the protocol.
Christensen outlined that the plan intends to establish a “destructive-only” deflationary approach, gradually reducing the fundamental token supply using an automatic burn process.
He communicated to CryptoMoon that, in order to avoid bankruptcy, the protocol would adhere to the traditional token distribution model by releasing more tokens to fill any gaps or deficits.
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2024-12-06 15:44