Buterin: The Market Should Revisit the Problem of Centralization

Ethereum co-founder Vitalik Buterin said in an interview with Bloomberg that the crypto ecosystem should learn some lessons from the FTX collapse. Acknowledging that the bankruptcy of FTX was a big event in the crypto industry, Buterin said that this event made him re-address the issue of centralization in the market. In this context, he proposed various solutions to improve proof of reserve for exchanges.

While saying that there are some security vulnerabilities in this Merkle Tree method, Buterin underlined that technologies such as ZK-SNARK should be used to show stock market reserves and responsibilities. (Merkle Tree method: A method for user deposits on platforms and how these deposits will be met within the scope of proof of reserve emerging for exchanges.)

Vitalik Buterin also made several suggestions to prevent exchanges from using funds in different areas, as in the case of FTX. As it is known, the biggest problem in the FTX exchange emerged as the use of user funds. Platform users, after making a collective withdrawal request, could not afford the stock market withdrawals due to insufficient liquidity and had to file for bankruptcy in a short time. Talking about the use of Plasma and Validium methods to stop exchanges from using user funds, Buterin mentioned that these methods can increase costs as a handicap.

Saying that centralized exchanges are partially beneficial, the Ethereum founder reminded that, for example, if the account password is lost, the assets can be accessed again with the account recovery method on the platforms. In addition, there is no access to assets held in an external wallet in case the keywords of the wallet address are lost.

Finally, Buterin thinks that centralized exchanges should adopt the proof-of-reserve mechanism in order to have more open and transparent codes in the future. Thus, these platforms will have taken an important step towards becoming a safe environment.

Market commentators agree that the collapse of FTX sets the crypto industry back several years. Moreover, while regulatory measures are likely to become more stringent, some feel that these measures could undermine the industry’s development.