In response to the FTX incident, Vitalik Buterin issued a protected CEX: proof of solvency. Explores the historical past of makes an attempt to carry exchanges nearer to being trustless, the constraints of those methods, and a few new, extra highly effective concepts that depend on ZK SNARKs and different superior methods.
Vitalik Buterin stated that utilizing ZK-SNARKs can enhance privateness and robustness, put all consumer deposits right into a Merkle tree, and use ZK-SNARK to show that every one balances within the tree are non-negative, including as much as some claims the worth of.
If we add a layer of hashing for privateness, the Merkle department supplied to every consumer won’t reveal every other consumer’s steadiness. For going one step additional, as an alternative of simply proving that the alternate has the funds to pay again the consumer, it is usually essential to stop the alternate from stealing the consumer’s funds solely.
In accordance with Vitalik Buterin, the perfect long-term answer is to depend on self-custody, supplemented by applied sciences similar to multi-signature and social restoration wallets to assist customers deal with emergencies. Within the quick time period, there are two clear alternate options: custodial exchanges similar to Coinbase, and non-custodial exchanges similar to Uniswap. Lastly, Vitalik Buterin acknowledged that within the quick time period, exchanges fall into two clear classes: custodial exchanges and non-custodial exchanges.
Right now, the latter class is simply DEXes, similar to Uniswap, and sooner or later we may see crypto-restricted CEXes, the place consumer funds are stored in one thing just like validium sensible contracts. We may see semi-custodial exchanges the place we belief them with fiat currencies fairly than cryptocurrencies. Each varieties of exchanges are right here to remain, and the simplest backwards-compatible method to enhance the safety of custodial exchanges is so as to add proofs of reserves. This features a mixture of proof of belongings and proof of liabilities. There are technical challenges in crafting an excellent protocol for each, however we are able to and may attempt to make progress on each and open supply the software program and processes as a lot as potential so that every one exchanges can profit.
In the long term, Vitalik Buterin needs us to maneuver nearer and nearer to all exchanges being non-custodial, at the very least relating to crypto. Pockets restoration will exist, and will require extremely centralized restoration choices for brand new customers coping with small transactions, and establishments requiring such preparations for authorized causes, however this may be executed on the pockets layer fairly than throughout the alternate itself.