Perhaps the most interesting thing in the crypto community is the gap between its professed ideals of creating trustless, code-mediated, decentralized finance and its centralized, opaque, fraud-riven reality. This cognitive dissonance is protected by the community’s aggressive immune response against any skepticism, critical analysis, or even negative sentiment about crypto-financial projects or structures. Welcome to crypto-Twitter.
When everybody was getting rich, there wasn’t much internal appetite to tackle these contradictions. But now that everyone’s going broke – either from the crash of these assets themselves or from the second-order collapse of the major crypto institutions – some are beginning to shrug and suggest they try to start addressing the major failures at the heart of this industry.
All crypto exchanges should do merkle-tree proof-of-reserves.
— CZ 🔶 Binance (@cz_binance) November 8, 2022
Banks run on fractional reserves.
Crypto exchanges should not.@Binance will start to do proof-of-reserves soon. Full transparency.
Here’s the thing: “Proof of Reserves causes at last two major problems.
First, it’s likely to take down major industry players, larger than FTX, such as Tether. Having this happen sooner rather than later is ultimately for the best, but decidedly against the interests of those industry leaders who might shift the industry norm towards a proof of reserves norm.
The second problem is this: proof of reserves, as currently discussed, would not protect against many of the major risks of centralized crypto players, leaving the industry with a fig leaf of protection and little actual protection. There’s no conceivable proof of researve system that could protect against dedicated outright fraud, as we saw at FTX, let alone human error, such as accidentally sending 82% of your ETH reserves to another company or theft (there are too many examples to even link one).
Ultimately, the world of crypto is going to have to abandon the myth that a technical system can completely eliminate the need for trust, and accept that ultimately, in any human-centered system, we’re going to have to rely on checks and balances, cleverly designed incentives, and – ultimately – some degree of trust to continue to interact with each other. It will never be the perfect techno-utopia envisioned by many, as long as there are humans sitting behind the screen. This is a reality that goes against the core ethos of the crypto community, and more importantly, against its financial interests, which is why it’s unlikely to ever be addressed.