According to the recent events of FTX, who were one of the exchanges o largest cryptocurrency market in the world, many other trading platforms exchanges Crypto are now considering alternative ways to ensure that their client funds are safe from the intentions of some of the industry players and to rebuild trust in the community. At the same time that the exchanges centralized work to achieve this objective, different options are also proposed to establish a definitive solution and thus avoid future problems.
The test that matters exchanges
While proof of funds, proof of reserves, and similar methods of increasing transparency can be a start, they don’t give users the confidence they need to move forward. Why? None of these solutions prove ownership of the keys needed to withdraw those funds from a exchange. While it is useful to prove that the funds are there, it is of no use to clients if they are not sure that they can withdraw their money whenever they want or need it. These solutions also do not ensure that the digital assets in a user’s wallet are sufficient to cover the liabilities of the user. exchange. Publicly disclosed reserves without publicly disclosed liabilities are simply not enough.
Now, the fundamental question is what should the exchanges. The answer is a multiple approach that starts from a solvency test but goes further. While not all of these efforts can be implemented overnight, it is crucial to carefully respond to valid user concerns and address them in an effective and sustainable manner. The combined commitment of the following five strategies will lead to adequate security and transparency for users: merkle tree Y Solvency Report, third-party auditing, establishment of an industry task force, zero-knowledge (ZK) testing, and regulatory compliance. Over time, implementing these practices will not only rebuild trust, but will also help foster widespread adoption of cryptocurrencies. By holding ourselves and others accountable, the industry can build trust among even the most crypto-skeptical while paving a path to innovation.
Merkle Tree and Solvency Report
In cryptography, a Merkle tree contains “leaves” each containing the cryptographic hash of a block of data. Therefore, a Merkle tree is a structure that allows secure verification of its content. It is a technique used to calculate and test reserves. For full transparency, a Merkle tree can help crypto platform users validate their balances while reflecting the creditworthiness of the entire company as a whole.
The bankruptcy of insolvent lenders such as 3 Arrows Capital and Voyager clearly demonstrated the need for information on the solvency of the platform where users place their funds. Without this tree, users were shocked to learn that their cryptocurrencies are tied to bankruptcy proceeds they could never have anticipated. By merging Merkle trees with clear credit reporting, clients will feel more comfortable with the way companies manage their assets and liabilities.
third party audit
Although verifying and testing assets and liabilities is key, a third-party audit should be implemented to confirm the position of each exchange. Hiring external entities to validate your assets, liabilities and solvency tests, makes them responsible to the supervision of a validating body. Third-party auditing provides the added peace of mind that clients and investors need to ensure that the platform they are using is telling the truth.
industry task force
Leaders must work together to develop an industry-wide standard. Attempts to harm competitors harm users much more, and the long-term impact this infighting will bring to the industry remains to be seen. We must work together to inspire innovation and collaboration, leading by example and following the open source spirit that underpins the blockchain and crypto community.
Zero knowledge (ZK) proofs
A zero-knowledge (ZK) proof is a cryptographic proof in which one party can prove to another that something is true without revealing any private information of the parties involved. The industry has reached a tipping point where it is time to replace processes based on mere trust with irrefutable cryptographic proofs. We should not rely on methods inherited from the traditional financial system to hold crypto companies accountable, as the technology is more complex and different than traditional systems. ZK testing allows credit sharing without exposing any sensitive information or requiring a third party audit to build trust.
Regulatory compliance
As the crypto world evolves, we must remain committed to sharing industry best practices and encouraging regulatory frameworks that create a more transparent, secure, and accountable industry. This requires education and cooperation from blockchain technology leaders, working together with regulators to ensure that the regulation developed is best for users first, while also championing the innovation opportunities that this technology presents. Working with governments and related entities is crucial to build trust among users and ensure regulatory compliance in a context of constant change.
Broadly speaking, in conclusion building trust and transparency between customers and the community will take time. It’s true that as more companies evolve into this nascent industry, there are some crucial considerations from the start: regulatory compliance, risk management, due diligence, and transparency. While Proof of Reserves and Proof of Funds are valid attempts to assuage user fears as our industry experiences rapid change and new challenges, hasty attempts at transparency will prove futile in the months and years to come. Taking diligent and thoughtful steps toward full transparency will require a lot more work, but the benefits to users, businesses, and the cryptocurrency industry as a whole will be astronomical.
Felipe Vallejo He has a degree in Economics from the Tecnológico de Monterrey campus Monterrey, and a degree in Law from the Autonomous University of Nuevo León. He also has a master’s degree in Public Policy from Harvard University, where he was Executive Director of the Latin American Policy Journal.