The CEOs of two of the world’s largest crypto companies endorse Ethereum (ETH) creator Vitalik Buterin’s idea of how exchanges can maintain transparency for their customers.
After the collapse of FTX and the revelations that accompanied it, scrutiny of crypto exchange reserve systems has circulated, prompting several companies to publish their reserves to prove their solvency.
Buterin suggested a system where users can check their personal balances via a Merkle tree, protected by the confidentiality of a zk-SNARK (non-interactive zero-knowledge succinct-knowledge argument).
“The simplest thing we can do is put all user deposits into a Merkle tree (or, even simpler, a KZG commit), and use a ZK-SNARK to prove that all user balances ‘tree are non-negative and add up to some claimed value. If we add a hash layer for privacy, the Merkle branch (or KZG proof) given to each user would not reveal anything about the balance of any other user .
Merkle Trees helps encode blockchain data more efficiently and securely and can help verify information quickly without revealing a complete data set. KZGs are a type of polynomial commitment scheme that allows verifiers to confirm claimed ratings.
Responding to Buterin’s proposal, Coinbase CEO Brian Armstrong thanked the Ethereum co-founder and said on-chain accounting would be important for the future of the industry.
Thanks @VitalikButerin for helping to advance this research. On-chain accounting will be an important part of the cryptoeconomy. https://t.co/UzqL0kMaEF
—Brian Armstrong (@brian_armstrong) November 19, 2022
Meanwhile, Binance CEO Changpeng Zhao said he works on Buterin’s new ideas.
Buterin says crypto exchanges should evolve to be non-custodial, but have certain centralized aspects in order to provide services such as wallet recovery and regulatory requirements.
“Longer term, I hope we will get closer and closer to all noncustodial exchanges, at least on the crypto side. Wallet recovery would exist, and it might be necessary to have highly centralized recovery options for new users dealing with small amounts, as well as for institutions that require such arrangements for legal reasons, but this can be done at portfolio level rather than within the exchange itself. .
On the fiat side, the movement between the traditional banking system and the crypto ecosystem could be through native cash-out/cashout processes of asset-backed stablecoins such as USDC. However, it will still take some time before we can fully get there.
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