The collapse of numerous major crypto ecosystems in 2022 revealed the urgent need for revamping the way crypto exchanges operate. Ethereum co-founder Vitalik Buterin believed in exploring beyond \u201cfiat\u201d methods to ensure the stability of crypto exchanges, including technologies such as Zero-Knowledge Succinct Non-Interactive Argument of Knowledge (zk-SNARKs)<\/a>.\u00a0<\/p>\n Following a discussion with angel investor Balaji Srinivasan<\/a>\u00a0and crypto exchanges such as Coinbase, Kraken and Binance, Buterin recommended<\/a>\u00a0options for the creation of cryptographic proofs of on-chain funds that can cover investor liabilities when required, also known as safe centralized exchanges (CEX). <\/p>\n Having a safe CEX: proof of solvency and beyondhttps:\/\/t.co\/AKEweYZfj2<\/a><\/p>\n Big thanks to @balajis<\/a> and staff from @coinbase<\/a> @binance<\/a> @krakenfx<\/a> for discussion!<\/p>\n \u2014 vitalik.eth (@VitalikButerin) November 19, 2022<\/a><\/p><\/blockquote>\n The best case scenario, in this instance, would be a system that does not allow crypto exchanges to withdraw a depositor\u2019s funds without consent.<\/p>\n Vitalik’s new ideas. Working on this. <\/p>\n Just don’t read the title aloud around people (Vitalik wrote it).https:\/\/t.co\/AtR6KiSx5B<\/a><\/p>\n \u2014 CZ Binance (@cz_binance) November 19, 2022<\/a><\/p><\/blockquote>\n Fellow crypto entrepreneur CZ, who has been vocal about Binance\u2019s intent for complete transparency<\/a>, acknowledged the importance of Buterin\u2019s recommendations, stating:<\/p>\n \u201cVitalik\u2019s new ideas. Working on this.\u201d<\/p><\/blockquote>\n The earliest attempt to ensure fund safety was proof of solvency, wherein crypto exchanges publish a list of users and their corresponding holdings. However, privacy concerns eventually fueled the creation of the Merkle tree technique \u2014 which dampened the privacy leakage concerns. While explaining the inner workings of the Merkle tree implementation, Buterin explained:<\/p>\n \u201cThe 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.\u201d<\/p><\/blockquote>\n As a result, Buterin placed his bets on cryptography via zk-SNARKs. For starters, Buterin recommended putting users\u2019 deposits into a Merkle tree and using a zk-SNARK to prove the actual claimed value. Adding a layer of hashing to the process would further mask information about the balance of other users.<\/p>\n Buterin also discussed implementing proof of assets for confirming an exchange\u2019s reserves while weighing the pros and cons of such a system, considering that crypto exchanges hold fiat currencies and the process would require crypto exchanges to rely on trust models better suited for the fiat ecosystem.<\/p>\n While long-term solutions will need the involvement of multisignature and social recovery wallets, Buterin pointed out two alternatives for the short-term \u2014 custodial and noncustodial exchanges, as shown below:<\/p>\n \u201cIn 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,\u201d added Buterin. On the other hand, highly centralized recovery options can be used for wallet recovery for small funds. <\/p>\n Related: <\/em><\/strong>Crypto self-custody a \u2018fundamental human right\u2019 but not risk-free: Community<\/em><\/strong><\/a><\/p>\n On Nov. 4, Buterin added a new category of milestones to the Ethereum technical roadmap \u2014 aimed at improving censorship resistance and decentralization of the Ethereum network.<\/p>\n Updated roadmap diagram! pic.twitter.com\/MT9BKgYcJH<\/a><\/p>\n \u2014 vitalik.eth (@VitalikButerin) November 4, 2022<\/a><\/p><\/blockquote>\n The updated technical roadmap now inserts the Scourge as a new category, which will run parallel to other previously-known segments \u2014 the Merge, the Surge, the Verge, the Purge and the Splurge.<\/p>\n<\/div>\n\n
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