Since the inception of Bitcoin in 2010, the crypto market has witnessed a few persistent problems from hacks to insolvency. Binance was recently hacked to the tune of $40 million as reported by CNBC. Security woes are becoming a rather common plight in the crypto market, fortunately, the problems faced by exchanges and other crypto projects are well known and there are many projects underway to provide better trust, transparency, and security.
Transparency has remained to be a major problem with cryptocurrency exchanges. We have seen cases of crypto exchange owners siphoning their own funds into customer withdrawals to appear solvent to the customers or dip into their own pockets to cover for missing money. most crypto exchanges also participate in wash trading and report fake volumes.
To solve the issue of transparency, two areas need to be involved and that is Proof of solvency and proof of legitimate trading volumes. Proof of solvency is critical because investors need to know the risk of engaging with a financial entity that holds their funds, unfortunately, exchanges do not want to publicly disclose the financial details of their internal operations.
There have been some intriguing technical advantages that have produced a promising glimpse of provable exchange reserves that remain private. Some of which include Blockstream announced a standardized tool for ensuring exchange solvency called “Proof of reserves”. Another solution is Arps enable exchanges to jointly compute the averages solvency without actually exposing their full solvency data to competitors.
Eliminating centralized custody
There have been many initiatives within the cryptocurrency sector to remove centralized exchanges entirely or at the very least their custody. Exchange custody over user funds is an established security threat that new generation of trust-minimizing technology and P2P exchanges are working on circumventing centralized custody funds.
Some of the projects working to correct this matter include the Atomic wallet, which focuses on deploying a technology called Atomic Swaps which enables users to exchange assets without the control of third party custodians. Another project is Morpher, a virtual trading platform that allows users to speculate on the market of the underlying asset via Ethereum smart contracts resulting in no fees and theoretically limitless liquidity for any type of market. The idea of P2P exchanges has also been gaining traction recently.
The idea of P2P exchanges and marketplaces have also been gaining traction recently, although decentralized.