Long-term solutions will need multisig and social recovery wallets, but Buterin came up with two short-term solutions: custodial and noncustodial exchanges.
The failure of several large cryptocurrency ecosystems in 2022 showed how badly cryptocurrency exchanges need to be fixed. Vitalik Buterin, who helped create Ethereum, thought it was important to look for ways to keep crypto exchanges stable other than “fiat,” such as Zero-Knowledge Succinct Non-Interactive Argument of Knowledge (zk-SNARKs).
After talking with angel investor Balaji Srinivasan and crypto exchanges like Coinbase, Kraken, and Binance, Buterin came up with ideas for how to make cryptographic proofs of on-chain funds that can cover investor liabilities when needed. These are also called “secure centralized exchanges” (CEX).
Having a safe CEX: proof of solvency and beyondhttps://t.co/AKEweYZfj2
— vitalik.eth (@VitalikButerin) November 19, 2022
Big thanks to @balajis and staff from @coinbase @binance @krakenfx for discussion!
In this case, the best-case scenario would be a system that makes it illegal for crypto exchanges to take a depositor’s money without their permission.
Vitalik's new ideas. Working on this.
— CZ
Just don't read the title aloud around people (Vitalik wrote it).https://t.co/AtR6KiSx5BBinance (@cz_binance) November 19, 2022
CZ, a fellow cryptocurrency entrepreneur who has spoken out about Binance’s commitment to full transparency, agreed with Buterin’s suggestions and said:
“Vitalik’s new ideas. Working on this.”
Proof of solvency, in which crypto exchanges show a list of users and how much money each one has, was one of the first ways to make sure money was safe. But privacy concerns led to the creation of the Merkle tree method, which eased worries about privacy leakage. Buterin talked about how the Merkle tree implementation works from the inside.
“The Merkle tree technique is basically as good as a proof-of-liabilities scheme can be if only achieving proof of liabilities is the goal. But its privacy properties are still not ideal.”
So, Buterin put his money into the use of zk-SNARKs in cryptography. Buterin’s first idea was to store user deposits in a Merkle tree and verify the amount with a zk-SNARK. Adding a hashing layer would make it even harder to find out how much money other users have.
Buterin also talked about implementing proof of assets to confirm an exchange’s reserves. He weighed the pros and cons of such a system because crypto exchanges hold fiat currencies and the process would require crypto exchanges to use trust models that work better in the fiat ecosystem.
Long-term solutions will need multisignature and social recovery wallets, but Buterin suggested that custodial and noncustodial exchanges could work in the short term.
“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,” Buterin said. To get small amounts of money out of a wallet, you can also use more centralized recovery methods.
Buterin added a new category of milestones to the technical roadmap for Ethereum on November 4, to make the network more resistant to censorship and decentralized.
The Scourge is a new phase that has been added to the updated technical roadmap. It will happen at the same time as the Merge, the Surge, the Verge, the Purge, and the Splurge.
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