The collapse of FTX has highlighted the need for new standards regarding the transparency of funds on cryptocurrency exchanges. As a result, Ethereum co-founder Vitalik Buterin has published his research to increase investor protection on centralized platforms.
Vitalik Buterin and proof of credit
Since the beginning of 2022, tens of billions of assets have evaporated with the collapse of centralized firms. In addition, the recent FTX scandal has damaged investor confidence in these platforms.
The recent FTX scandal has damaged investor confidence in these platforms.
However, not all centralized exchanges are destined to go down with their customers’ money. This is, at least, what Vitalik Buterin, the co-founder of Ethereum, hopes for.
The man who needs no introduction recently shared on Twitter the results of his research on “proof of creditworthiness”:
Having a safe CEX: proof of solvency and beyondhttps://t.co/AKEweYZfj2
Big thanks to @balajis and staff from @coinbase @binance @krakenfx for discussion!
– vitalik.eth (@VitalikButerin) November 19, 2022
“Having a secure CEX: proof of creditworthiness and beyond “
According to its author, proof of solvency is a means of allowing exchanges greater transparency on the storage of their clients’ funds.
This method is not so recent: the premises of proof of solvency date back to 2011 with the exchange Mt.Gox.
At that time, in order to prove that the Mt.Gox platform owned its customers’ bitcoins (BTC), a transfer representing all the platform’s assets was made to a predefined address upstream. The transaction on the blockchain showed the amount of cash held by the platform.
Today, the means used are no longer so rustic. The Merkle tree method, used by some cryptocurrency exchanges, allows each user to reliably know the balance of his assets on the platform used.
This is notably the technology used by the Kraken exchange, founded in 2011 by its current CEO Jesse Powell.
In the absence of regulation, Web3 is self-regulating
Despite existing techniques, few exchanges were very transparent. But since the collapse of FTX, the biggest players in the ecosystem are coming together to turn the exception into a standard applicable to the majority.
Indeed, in the above-mentioned tweet as well as in his article, Vitalik Buterin thanks Coinbase, Binance and Kraken for their contributions and collaboration on the issue of exchange transparency.
For his part, Binance CEO Changpeng Zhao expressed his interest on Twitter by reposting Vitalik Buterin’s article:
Vitalik’s new ideas. Working on this.
Just don’t read the title aloud around people (Vitalik wrote it).https://t.co/AtR6KiSx5B
– CZ 🔶 Binance (@cz_binance) November 19, 2022
“Vitalik’s new ideas. I’m working on it. “
While regulation is struggling to be applied globally, it is therefore business leaders who are now acting for the safety of customers.
Furthermore, there is a strong possibility that future legislation will be inspired by these standards in order to regulate the cryptocurrency industry.
Even so, if only a few individuals succeed in changing the way exchanges operate, then we should consider the dangers that this centralisation could have on the future of the industry.
