Reversible transactions can play a key role in driving crypto adoption

The irreversibility of blockchain transactions is often touted as proof of crypto’s security. Because a transaction cannot be undone, there is no way for fraudsters to initiate a chargeback after transferring funds to purchase a product. It provides the ultimate level of protection for sellers – especially those who may have been burned in the past using a third-party service like PayPal, where chargebacks are not only common, but very difficult to challenge in the event of fraud.

There is an argument that can be made that blockchain’s irreversibility is one of the reasons why it is such a secure technology. However, there are drawbacks to this unique feature of blockchain. After all, blockchain users are only human and mistakes are often made. The problem is that blockchain wallet addresses are essentially a long string of random numbers and letters, and it’s very easy to make a mistake when entering one manually. If an address is wrong and the transaction is confirmed, those funds will either end up in the wrong wallet or be lost to the ether forever, never to be seen again.

Another problem arises from the complexity of DeFi, where users will often perform a number of cross-chain transactions. For example, they can borrow from a protocol on one chain, then link those tokens to another chain before putting them into a liquidity pool. This is a three-step transaction that traders can perform to take advantage of arbitrage opportunities, but such transactions are fraught with risk in case any of the steps in the process fail.

Why can’t blockchain transactions be reversed?

Finality of transactions is a key design feature of blockchain that is necessary due to its decentralized nature. Unlike a bank transfer, which is carried out by a trusted third party, blockchain transactions are processed by validators when consensus between the various nodes that make up the network is reached. Because the blockchain records are stored across multiple nodes, the distributed ledger is immutable, meaning it cannot be changed by any single node or user. If someone tried to change a transaction, the rest of the network would know about it and reject that change.

Blockchains are designed this way for security reasons, as it eliminates a problem known as “double spending”, where a user can try to cheat and use the same funds to make multiple transactions.

So because of the way blockchains are decentralized, there is no way to reverse a transaction. The only way money can be returned is if the person who received it decides to send it back. That can be problematic, because if funds are sent to a complete stranger, that person may well be tempted to keep them, as they won’t face any trouble to do so.

The problems caused by irreversible transactions

While many see blockchain irreversibility as a good thing, it can also create big problems when mistakes are made. There is a strong argument that if cryptocurrency is to replace fiat as a mainstream payment method, people will need a way to reverse transactions when funds are sent to the wrong address.

Although copying and pasting addresses or scanning a QR code eliminates most errors, these methods are not completely error-free. It is, for example, possible to change the address by accident after scanning. Alternatively, the sender may enter the wrong amount of coins to be sent. This happens more often than people realize because people often price things in US dollars or some other fiat currency, and then send the corresponding amount in crypto. To send $50 in BTC, a user must transfer 0.0027 BTC at the current exchange rate. But it’s all too easy to accidentally send 0.027 BTC ($500) instead.

It’s not just errors that are a concern. Another big problem is that wallets get hacked. In traditional banking, users are assured that if their bank account is hacked and someone transfers money from their account, the bank will eventually refund them the amount that was lost. This will not happen with blockchain transactions, as there is no centralized body that can issue the refund. Security is the sole responsibility of individual users, so if your wallet is somehow compromised, you can almost certainly say goodbye to what was in it, forever.

Why a safety net is necessary

It is clear that many people can benefit from having the ability to reverse blockchain transactions. However, the difficulty is enabling this in a way that does not compromise blockchain security. If someone can send payment for goods or services and then reverse that transaction once the product is delivered, crypto will lose all credibility and no one will use it anymore.

It’s a difficult problem to solve, but there are some very clever minds who have already come up with a solution. A good example is the t3rn protocol, which has developed a platform that executes smart contracts with a built-in fail-safe mechanism to ensure that complex transactions are either processed correctly, or completely reversed in case of problems.

T3rn provides a good illustration of how its failsafe mechanism works in this blog post. Imagine a user plans a five-step transaction that involves bridging tokens from Ethereum to Polkadot and then to Moonbeam, with various additional exchanges and deposits along the way. This type of transaction is usually performed by DeFi merchants, but can cause problems if the user does not have enough coins in their balance to pay the gas fees for each transaction. Should they run out of gas at stage three or stage four, the tokens will remain at that stage, causing a major headache for the trader. They will almost certainly miss out on whatever arbitrage opportunity they were hoping to exploit.

With t3rn this is not a problem. Its unique fail-safe mechanism involves placing the assets involved in each step of the transaction in escrow. This way, they will only be released when each step of the transaction has been completed. If any of the steps are not executed, t3rn will simply cancel the transaction and all the previous steps will be reset. As you can see in the example above, Bob will simply get all his original ETH tokens back in his wallet, without losing any gas fees.

The beauty of t3rn is that it allows users to compose complex transactions through a simple user interface, where each of the steps is arranged in a chronological manner. The protocol also supports several wallets, including MetaMask, Ambire Wallet and others.

Paving the way for greater adoption

The blockchain reversibility enabled by t3rn may well prove transformative for the crypto industry. It opens up the possibility for users to better protect their digital assets by introducing a security mechanism for every single transaction they ever make. If someone accidentally sends $500 worth of tokens instead of just $50, they now have a way to reverse that transaction and correct the mistake, without relying on the honesty of the person who received the money.

Such an ability is an essential safeguard that will benefit regular users and DeFi traders alike, and perhaps create greater confidence in crypto in general. While the blockchain’s final transaction cannot, and should not, be sacrificed, people still need a way to avoid being penalized for honest mistakes. By offering that option, t3rn could go some way towards bringing in the next generation of more cautious crypto users who need some sort of safety net.