Custodial and noncustodial exchanges were mentioned as short-term possibilities by Buterin, however multisig and social recovery wallets are required for long-term solutions.
The demise of a number of significant crypto ecosystems in 2022 highlighted the urgent need to overhaul how crypto exchanges function. To assure the stability of cryptocurrency exchanges, Ethereum co-founder Vitalik Buterin believes in utilizing techniques other than “fiat,” such as Zero-Knowledge Succinct Non-Interactive Argument of Knowledge (zk-SNARKs).
After speaking with angel investor Balaji Srinivasan and representatives from cryptocurrency exchanges like Coinbase, Kraken, and Binance, Buterin suggested strategies for building secure centralized exchanges, also known as safe exchanges, that can create cryptographic proofs of on-chain funds that can cover investor liabilities when necessary.
In this case, the ideal system would prevent cryptocurrency exchanges from taking depositsers’ money without their permission.
Fellow cryptocurrency entrepreneur CZ acknowledged the significance of Buterin’s recommendations and expressed support for Binance’s commitment to total transparency, saying:
“Vitalik’s new ideas. Working on this.”
Proof of solvency, in which crypto exchanges publish a list of users and their corresponding holdings, was the first attempt to guarantee fund safety. The Merkle tree technique was eventually developed as a result of privacy concerns, which lessened worries about privacy leakage. Buterin described the inner workings of the Merkle tree implementation as follows:
“The Merkle tree technique is basically as good as a proof-of-liabilities scheme can be, if only achieving a proof of liabilities is the goal. But its privacy properties are still not ideal.”
Because of this, Buterin gambled on cryptography using zk-SNARKs. Buterin suggested storing user deposits in a Merkle tree as a starting point, and then utilizing a zk-SNARK to demonstrate the real claimed value. Hashing would be added to the process to further obscure information about other users’ balances.
Given that crypto exchanges hold fiat currencies and that the process would necessitate that crypto exchanges rely on trust models more appropriate for the fiat ecosystem, Buterin also discussed implementing proof of assets for confirming an exchange’s reserves while weighing the advantages and disadvantages of such a system.
Custodial and noncustodial exchanges were mentioned as short-term options by Buterin, but multisignature and social recovery wallets will be required for long-term solutions, as seen below:
Two short-term options for alternatives for safe CEX. Source: hackmd.io (via Vitalik Buterin)
“In the longer-term future, my hope is that we move closer and closer to all exchanges being non-custodial, at least on the crypto side,” inserted Buterin. On the other hand, wallet recovery for little money can make use of highly centralized recovery techniques.
On November 4, Buterin introduced a new category of milestones to the Ethereum technical roadmap with the intention of enhancing the network’s decentralization and resilience to censorship.
The Scourge has been added as a new category to the revised technological roadmap, running concurrently with the Merge, the Surge, the Verge, the Purge, and the Splurge.