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It is my understanding that blockchain technology is decentralized meaning there is no middle man in transactions. This seems like it has benefits but it also has downsides. When necessary, middlemen are able to retrieve objects under their control and redistribute. But with blockchain, if a private key is stolen (this will inevitably happen a lot; probably due to social engineering) and funds are transferred, how can they be recovered? Other than getting the culprit to hand over their private key of course. Is there any "police" mechanism within the blockchain technology?

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Proof-of-work blockchains offer transaction immutability, meaning transactions can't be undone or modified after the fact without having to redo all the work that was done since the time of the transaction.

In the case of a fraudulent transaction, several problems arise:

  • How can it be proven the transaction was indeed fraudulent? How can validators and miners determine which of the parties involved is the "rightful" owner? As far as the system is concerned, providing a valid signature is proof of rightful ownership.

  • If the transaction in question was confirmed, you'd need 50+% of miners to agree to redo all the work they already did in order to create an alternate history where the fraudulent transaction didn't occur. This rewriting has a huge cost on the network (while miners redo the work, they can't build on top of the latest block, grinding the chain to a halt). Getting people to agree to this would be nearly impossible.

Some blockchains (in particular Ethereum) had to deal with this issue (DAO problem) and opted for a custom change to the consensus code, which made that change opt-in and eventually resulted in a chain split between the people that wanted to remove the "fraudulent" transactions and those that didn't. Others (OMNI in the case of a Tether heist) decided to blacklist the addresses containing the stolen funds, requiring yet another custom, opt-in change to the consensus code.

Both cases involved humans making hard decisions and leaving some people unhappy about it, there isn't so far a generalized, on-chain, way to deal with this issue.

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  • Does each individual bitcoin have a serial number?
    – mathewbruens
    Mar 30, 2018 at 20:47
  • @mathewbruens No. The blockchain is an immutable record of transaction outputs by which a balance is available to spend for the holder of the relevant private key. Transactions are instructions to move utxo's to new utxo's. Really, all that exists is utxo's and the instructions necessary to spend them.
    – Willtech
    Mar 31, 2018 at 7:38
  • If a transaction had to be reversed, it cannot be. What is necessary is a new transaction spending the balance of the fraudulent transaction's utxo's to a new address, which requires the private keys for the fraudulently obtained utxo's to sign for the transaction. Only catching the crook and forcing him to pay back stolen Bitcoins will work.
    – Willtech
    Mar 31, 2018 at 7:40
  • The attraction of bitcoin is that it has no administrative functions. If it had some kind of "reverse transaction" administrative function, who would be authorized to operate it? Every government? Some governments? There is no government that represents everyone who might use bitcoin.
    – David Schwartz
    Jul 2, 2020 at 0:32

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