Since the collapse of FTX, investor confidence in centralized exchanges has reached an all-time low. A trend that worries many players in the crypto market, including Ethereum co-founder Vitalik Buterin.
In a blog post, Vitalik Buterin explained how crypto exchanges can regain investor confidence.
According to him, the solvency of centralized exchanges has been at stake since the Mt Gox crash in 2011.
In 2013, several solutions were proposed to help crypto exchanges prove that they have enough assets to cover their users’ deposits. That’s why most platforms rely on the Merkle Tree method.
ZK-SNARKS: a simple and effective solution
Vitalik Buterin noted that the Merkle Tree method is not entirely secure as it carries privacy risks.
However, crypto exchanges can gain credibility and transparency by using other means such as ZK-SNARKS technology.
“The simplest thing we can do is put all user repositories in a Merkle tree (or, even more simply, a KZG commitment)and use a ZK-SNARK to prove that all balances in the tree are positive and add up to a certain amount.”
Vitalik Buterin pointed out that transferring funds from cold wallets to public addresses allows crypto exchanges to prove their reserves in an easy way. However, this method in particular can cause problems “the double use of the guarantee and the additional costs associated with the signature of the messages to prove the ownership of these addresses”.
“Exchanges could use plasma chains and validiums to prevent misuse of user funds. But it also has drawbacks, such as blocking funds in case the manager disappears,” he added.
Vitalik Buterin also clarified that while decentralized crypto exchanges (DEX) offer benefits, centralized exchanges (CEX) can help users recover their accounts if they lose or forget the password.
What future for CEX?
According to the Ethereum co-founder, the future will be semi-custodial exchanges based on cryptographic technology.
Finally, note that Vitalik Buterin’s article was co-written with the teams at Coinbase, Binance, and Kraken.
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