Vitalik Buterin, Ethereum co-founder and a well-known blockchain programmer, published a blog post about how centralized exchanges can become trustless.
Buterin believes that the best proof of the reserves is a zero-knowledge succinct non-interactive argument or knowledge (ZK-SNARK).
On November 19, 2022, Vitalik Buterin published a blog about how centralized exchanges or CEXs can use cryptographic proofs to assure the public that the funds held on-chain cover what they owe.
Buterin wrote that, in addition to the traditional finance or TradFi measures of auditors, corporate governance, licensing, and due diligence, CEXs could implement a system that prevents them from withdrawing users’ funds without their consent.
The blog explained, citing a discussion that began nine years ago,
“If you prove customer deposit equal X (proof of liabilities), proof of ownership of private keys of X coins (proof assets), then you have the proof of solvency.”
The discussion by Buterin comes just a week after the collapse of derivatives exchange FTX, which its new CEO, John Ray, described as a “complete failure of corporate controls.”
The blog post, which acknowledged input from Coinbase, Kraken, and Binance, stated that such large blow-ups could be avoided by employing cryptographic proofs such as the balance sheet technique, Merkle Tree, ZK-SNARK, Plasma, and Validiums.