- Ethereum founder Vitalik Buterin suggested ways of cryptographically improving the transparency of centralized exchanges (CEXs).
- He explains previous methods, such as Merkle trees, and improvements, like ZK-SNARKs.
- Although self-custody is ideal in the long term, Buterin said custodial and non-custodial exchanges remain in the short-term.
Ethereum founder Vitalik Buterin proposed methods of improving centralized exchanges (CEXs) by bringing them closer to decentralized exchanges (DEXs).
In the introduction of his blog post, Buterin lays out his premise. In the wake of FTX, a CEX which abused its customers’ trust, he envisions ways of making exchanges increasingly trustless.
For instance, “exchanges could create cryptographic proofs that show that the funds they hold on-chain are enough to cover their liabilities to their user.”
Buterin further poses the possibility of building systems where exchanges rely on users’ explicit permission to use their deposited crypto.
The Ethereum founder then related that a spectrum exists of many possibilities between “the ‘don’t be evil’ aspiring-good-guy CEX and the ‘can’t be evil,’ but for-now inefficient and privacy-leaking, on-chain DEX.” In aspiring to reach the appropriate balance, he relates previously used methods and offers some improvements.
Merkle trees and ZK-SNARKS
“The simplest way to prove deposits is to simply publish a list of (username, balance) pairs,” Buterin said. However, this method is insufficient for users’ privacy needs, which leads to the innovation of the Merkle tree.
In such a tree, each end node would be a user and their deposit amount. These users would also have access to any antecedent nodes and the root node to verify their deposits.