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The collapse of many major crypto ecosystems in 2022 revealed the urgent need to revamp the way crypto exchanges work. Ethereum (ETH) co-founder Vitalik Buterin believed in exploring beyond “fiat” methods to provide stability to crypto exchanges, including technologies such as Zero-Knowledge Non-Interactive Succinct-Knowledge Argument (ZK-SNARK).

Following a discussion with angel investor Balaji Srinivasan and crypto exchanges such as Coinbase, Kraken and Binance, Buterin advised options for the creation of blockchain fund crypto proofs that can cover investors’ liabilities if necessary, i.e. safe centralized exchanges (CEX).

The best-case scenario, in this case, would be a system that does not allow crypto exchanges to withdraw funds from a depositor without their consent.

Fellow CZ crypto entrepreneur, who has been vocal on Binance’s intent for full transparencyacknowledged the importance of Buterin’s recommendations, stating that:

“Vitalik’s New Ideas. Work on it.

The first attempt to ensure the safety of funds was proof of credit, in which crypto exchanges publish a list of users and their corresponding holdings. However, privacy concerns eventually fueled the creation of the Merkle Tree technique, which alleviated privacy leak issues. While explaining the inner workings of the Merkle tree implementation, Buterin explained:

“The Merkle tree technique is basically as good as a proof-of-responsibility system can get, if the goal is only to obtain proof of responsibility. But its privacy properties are still not ideal.

As a result, Buterin placed his crypto bets through ZK-SNARK. To start, Buterin recommended placing user deposits in a Merkle tree and using a ZK-SNARK to prove the real value claimed. Adding a hash layer to the process would further obscure balance information from other users.

Buterin also discussed implementing proof-of-assets to confirm an exchange’s reserves while weighing the pros and cons of such a system, given that crypto exchanges hold fiat currencies and the process would require crypto exchanges to rely on trust models better suited to the fiat ecosystem. .

While the long-term solutions will require the involvement of multisig wallets and social recovery, Buterin highlighted two alternatives for the short term – custodial and non-custodial exchanges, as shown below:

Two short term options for safe CEX alternatives. Source: (via Vitalik Buterin)

“Longer term, I hope we get closer and closer to all noncustodial exchanges, at least on the crypto side,” Buterin added. On the other hand, highly centralized recovery options can be used for portfolio recovery for small funds.

Related: Crypto self-custody is a “basic human right” but not without risk: Community

On November 4, Buterin added a new category of milestones to the Ethereum technical roadmap – aimed at improving censorship resistance and decentralization of the Ethereum network.

The updated tech roadmap now inserts Blight as a new category, which will run alongside other previously known segments – Fusion, Surge, Edge, Purge, and Madness.

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