The almost overnight incident that unraveled with one of the biggest crypto exchanges known to the crypto space; FTX; has most probably resulted in the crypto space retracing a few steps. With such big amounts requested for withdrawal and the company not being able to meet the requirements to it mishandling its balance sheets, the FTX collapse has not only resulted in the exchange filing for the Chapter 11 bankruptcy but also caused many other institutions and VCs to lose out on massive funds!
Sitting with Bloomberg, the Ethereum Co-Founder, Vitalik Buterin, said that this whole incident once again pointed out that the problem lies within the people and not within the crypto technology that caused the unraveling. This is the biggest lesson that the FTX incident has given us all. In the Bloomberg article, Vitalik acknowledged that the underlying stability of distributed ledger and the technology that is powering the crypto asset economy is not the point that has come into question. The problem in this instance (and several before it) has been people, not technology.
While sharing his two cents, Vitalik Buterin said it is a “huge tragedy”, referring to the FTX collapse; however, he also added that the incident also reaffirms the position of many in the Ethereum community whose concern is about centralization. According to the CoinTelegraph report, he commented, “That said, many in the Ethereum community also see the situation as a validation of things they believed in all along: centralized anything is by default suspect.” Vitalik also added that this means that this community ethos means trusting in open and transparent code above humans.
As a means to make it more understandable; during the weekend, Vitalik shared a process that can be used for “safe CEX” with proof of insolvency. Proof of Insolvency is basically a means to not rely solely on “fiat methods” which include things like government licenses, auditors, and corporate governance. Rather than running background investigations of people running the exchanges, the exchanges could alternatively create “cryptographic proofs that show that the funds they hold on-chain are enough to cover their liabilities to their users.”
Having a safe CEX: proof of solvency and beyondhttps://t.co/AKEweYZfj2
— vitalik.eth (@VitalikButerin) November 19, 2022
To explain the process even better, Vitalik also published a blog explaining the workings of the same, using the Merkle tree technique.
However, Vitalik is not the only crypto industry leader who is talking about the FTX collapse, Binance CEO, Changpeng Zhao also spoke about his understanding of the situation. He mentioned that while regulation is necessary, it is more important for industry players to lead by example. Speaking at Indonesia Fintech Summit 2022, he said, “I think basically we’ve been set back a few years now. Regulators rightfully will scrutinize this industry much, much harder, which is probably a good thing, to be honest.”
Read more on: What is Proof of Reserve?