Etherium creator figures out how to prove transparency of cryptocurrency exchanges
A number of centralised crypto platforms have gone bankrupt this year. The latest high-profile case was the collapse of crypto exchange FTX. The reasons for these collapses may vary, but one thing is clear: the concept of centralized exchanges or similar platforms needs to be integrated in a radical way. This is one of the things that the creator of Etherium, Vitalik Buterin, is pushing for. That said, the ideas he published appealed to Binance chief executive Changpen Zhao. The latter has already said he is working on implementing them. We tell you more about what is happening.
It should be noted that the trend of confirming cryptocurrency exchanges’ reserves was born immediately after the problems with the FTX exchange. As a result, representatives of trading platforms want to prove in this way that they are not using users’ funds in any prohibited way, but simply storing cryptocurrencies. Accordingly, when coin owners want to withdraw their coins, there will be no problem.
The cryptocurrency exchange Binance was the first to show its reserves. Although this system offers more transparency, it still has its drawbacks. Read more about this in a separate article.
Stablecoin USDT stocks on the Binance exchange
How will crypto exchanges regain user trust?
With the support of business angel Balaji Srinivasan, the creator of Etherium, Vitalik Buterin, has published an article that discusses the main principles of proving the financial viability of centralized crypto exchanges using crypto techniques. Buterin posted a link to the article on his Twitter feed, with Zhao responding to his post soon enough. The Binance CEO liked the publication and said he was already working on some of Vitalik’s ideas.
Binance CEO Changpen Zhao
In the article itself, Vitalik refers to the first version of the so-called Proof-of-Solvency concept – which is when exchanges published lists of users with their balances to prove their financial solvency. However, privacy concerns eventually led to the application of Merkle’s tree principle, which reduced fears of information leakage.
If you are not familiar with the concept of the Merkle tree, we recommend that you read this article. It will help you understand the basics of the phenomenon and possible applications in this area.
Here is how Buterin describes the principle itself. The developer’s remark is cited by Cointelegraph.
Merkle’s tree technique is in principle as good as a commitment proof scheme can be if the goal is only to achieve a commitment proof. But its privacy properties are still not perfect.
Merkle’s tree
Buterin instead relies on the cryptographic principle of zk-SNARK, i.e. its application within Proof-of-Solvency. Vitalik recommends putting user balance information into Merkle’s tree and using zk-SNARK to prove the real declared value of a user’s funds. Adding a hashing layer to this process would further hide balance information.
As a reminder, zk in this case stands for "zero-knowledge", i.e. zero-disclosure proof. It refers to a protocol that allows you to confirm the correctness of certain data without disclosing it.
This is not the first time Vitalik himself has proposed integrating this concept. In particular, in August he proposed making NFTs more anonymous in this way.
The desire to make crypto exchanges as secure as possible is an important initiative for the crypto industry. Nevertheless, users should still try to keep most of their coins in cold wallets. That’s exactly what popular rapper Drake is doing – he shared a picture of his own cryptocurrency wallet Ledger, encrusted with diamonds, on his Instragram.
Rapper Drake’s cryptocurrency wallet
Drake is one of many famous performers who use Ledger devices. And other celebrities are openly partnering with the crypto-wallet maker. Admittedly, this time Ledger’s VP of communications Ariel Wengroff has confirmed that Drake’s Instagram post is not advertising. Here’s her rejoinder.
Ledger didn’t partner with Drake or give him this cryptocurrency wallet, but we’re not surprised that Drake appreciates the benefits of self control and protection of his assets. Self-confidence is paramount.
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While it’s not known exactly how many bitcoins Drake has now, he’s popular for making big sports bets in Bitcoin, among other things. In addition to winning the Super Bowl, last summer he won over $1.4 million in BTC on UFC betting on gambling site Stake, making predictions totaling around $2.3 million.
It’s good PR for Ledger, although the company’s cryptocurrency wallet has previously made headlines in the videos of other popular performers YG and Saweetie. However, within the cryptocurrency community, what made Ledger more popular was the very collapse of Sam Bankman-Fried’s FTX exchange. This event showed that investors need to be prepared for the collapse of even the most popular and supposedly reliable platforms.
And Ledger representatives noted that interest in their products has indeed increased. Specifically, Ledger's CXO Iain Rogers told TechCrunch that the first Sunday since the collapse of cryptocurrency exchange FTX turned out to be a record sales volume for the hardware wallet maker. And the previous week before that was also a record week.
Ledger hardware wallet
You can spot the presence of the hardware wallet from the legendary French manufacturer in this clip as well.
We believe that confirming cryptocurrency exchanges' own reserves while indicating commitments will eventually become the new standard within the industry. However, one one-size-fits-all is unlikely to end up being the way to go. So users will have to decide which system they prefer.
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