How do you rebuild trust in cryptos?
The FTX collapse has been, to put it mildly, devastating for everyone in the crypto space, from large exchanges to individual investors. Combined with the bear market, the news has triggered a slide in crypto prices across the board, dragging their total market capitalization below $800 billion.
No wonder then confidence in cryptos, especially among retail users, is at an all-time low.
Exchanges have been scrambling to disclose more information about their finances in order to calm the nerves of harried investors. Proof of Reserves has emerged as the preferred route many crypto exchanges want to venture into to bring more transparency into their work.
Economy Middle East spoke to industry experts to get their views on what they believe is the best way forward for the crypto sphere to find its way out of this chaos.
“Proof of reserves is a phrase that’s been bandied about by a number of exchanges, but showing proof of reserves doesn’t prove much without proof of liabilities and other data points,” said Richard Gardner, CEO of Modulus Global.
This resonates with Rishabh Gupta, Director of Operations with crypto incubator TDeFi, who believes that while frequent audits like these are still better than no audits, Proof of Reserves on Blockchain is the only way ahead if any centralized entities such as exchanges, and lending platforms want to reinstall confidence amongst the users.
“True Proof of Reserves can be achieved through a Merkel tree which enables real-time tracking of funds from its source to destination and any transaction analysis tool like Chainalysis can be used through an API call to check the wallet balances,” explained Gupta.
However, Gupta argues that even such tracking won’t prevent the centralized custodian of funds such as exchanges from handing out funds to unvetted borrowers who might fail to repay the loan. He stresses the need for proper governance to ensure the proper usage of funds.
Gardner concurs. He believes regulators must ask exchanges to participate in a complete digital exchange trust system that instills integrity throughout an exchange.
“Such a system, which anonymizes data points and directly connects exchange ecosystems to regulators, could offer exchanges the privacy they look for, alongside the kind of reliability required to make the industry safer,” explains Gardner. He thinks such a system of transparency, together with a complete regulatory guidebook, will help give the industry the stability it needs to wriggle out of its current predicament.
Max Thake, co-founder at the Web3 company “peaq” adds another dimension to the healing process. He is of the opinion that the bear market will help cull the weak and fraudulent projects, leaving enough room for the good ones to grow.
“As always, but perhaps more than usual in this bear market, usability is king,” said Thake. “If your project can deliver value to its users, then you will survive the chaos of the market and contribute to the next era of blockchain, which will have fewer veiled scams and stronger foundations than crypto in the bull market.”