The cryptocurrency ecosystem underwent a turbulent year in 2022. Criticism inside and outside of the crypto industry was fueled following the collapse of FTX, Celsius, Three Arrows Capital and the Terra ecosystem.
A number of losses have been recorded from these events. Blockchain analytics firm Chainalysis released a report in December of last year, which noted that the depegging of Terra’s stablecoin, Terra USD Classic (USTC), saw weekly-realized losses peak at $20.5 billion. Findings further show that the subsequent collapse of Three Arrows Capital and Celsius in June 2022 saw weekly-realized losses reach $33 billion.
While these events may have resulted in a loss of trust within the crypto ecosystem, it’s important to point out that blockchain technology and cryptocurrency have not failed. To put this in perspective, Dan Morehead, chief operating officer at Pantera Capital — an American hedge fund specializing in cryptocurrency — stated in a Dec. 19, 2022 letter to investors:
“The narrative that blockchain skeptics and some regulators and politicians are pumping out misses the point. The collapse of FTX had nothing to do with blockchain technology. It’s not crypto that failed. Bitcoin and all the other protocols worked perfectly.”
To Morehead’s point, companies within the crypto and blockchain sector continue to build and release products, despite recent events. In fact, a number of projects are focused more than ever before on instilling trust within products.
Companies aim to ensure trust
Paul Brody, global blockchain leader at EY and an Enterprise Ethereum Alliance board member, told Cointelegraph that he senses a renewed respect for the value of rules, regulations and the idea that the rule of law has a role to play within the crypto sector. “The narrative that ‘code is law’ doesn’t seem to come up so much anymore in discussions,” he said.
Given this, Brody believes that auditors, regulators and mathematical proofs will play a critical role in building trust with transparency within the crypto sector:
“I think we can look forward to a future where not only will code be published, but firms will publicly appoint external auditors and welcome regulatory inspections. I think there’s also a role for more standardization of how firms in this industry report their data.”
To Brody’s point, a number of crypto companies have started placing an emphasis on audits and data reporting. For example, Jordan Kruger, co-founder of Vesper Finance and head of decentralized finance (DeFi) at Web3 infrastructure layer Bloq, told Cointelegraph that her firm has been subject to a number of audits since launching in 2021.
“It has undergone more than fifty independent audits across the multiple smart contracts that comprise its pools and strategies,” she said.
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Kruger noted that while this has been important for Vesper’s users, regular audits should be viewed as a contribution to the DeFi ecosystem as a whole. “Our focus on software quality means that when other DeFi protocols integrate with us, they can partially draft behind Vesper’s significant investments in auditing.” This is an important point, as DeFi protocols witnessed some of the largest hacks and scams in 2022. Regular smart contract audits may have prevented some of these from occurring.
In addition to audits performed on DeFi protocols, the nonfungible token (NFT) sector is starting to implement audits, particularly when it comes to the phygital offerings, or physically-backed NFTs. For example, Jake Spinowitz, head of community at Courtyard — an NFT marketplace that enables collectors to trade and store physical collectibles — told Cointelegraph that Courtyard arranges third-party audits of its custodied items to ensure trust and transparency.
Moreover, Spinowitz explained that Courtyard is working with the security provider Brinks to safeguard physical assets that are tied to digital twins. “When tasked with safeguarding someone’s prized physical possessions, there should ideally be a proven ability to securely vault, handle, and transport those assets (to mitigate risk further, all physical collectibles we vault are insured at market value),” he said.
The combination of audits, along with using a legacy security institution, may serve as a successful model for phygital projects moving forward. This could certainly be useful, as a number of phygital platforms have expressed concerns regarding the redemption and storage process of physical NFT assets.
While auditing and data reporting may become standards within the cryptocurrency ecosystem, protecting user data will also become critical. Sandy Carter, senior vice president and channel chief at Web3 domain provider Unstoppable Domains, told Cointelegraph that her firm is allowing domain owners to control the information they share.
“For example, our login feature gives you the option to share off-chain profile data to earn rewards from your favorite DApps or display your domain on a leaderboard. The data you share is completely opt-in,” she explained. Moreover, Carter noted that Unstoppable Domains recently changed the way domains are minted. “All domains will now be automatically minted on the blockchain, as opposed to Unstoppable’s database,” she said.
Chris Castig, co-founder of Console.xyz — a Web3 chat platform — told Cointelegraph that Web3 principles focused on trust must ensure a minimum impact that any one human, group, or institution can have on the users of the app. As such, he explained that platforms like Console allow users’ social graphs, which include their followers, network and more, to live on the blockchain. He elaborated:
“We use smart contract and NFT integrations so that social graphs live outside of our app and on the blockchain. That means that if your community ever wanted to leave Console, it’s easy to find a new home somewhere else. You own your community, not us.”
Castig further noted that his company uses Ethereum Name Services (ENS) for identity rather than user names. “ENS names (.eth) or any equivalent decentralized identity like (.btc, .tez, etc) can be used to replace usernames and passwords on your site,” he said. In turn, an additional layer of user privacy and trust is achieved.
“On a social site where I’m interacting with other people, my ability to use a consistent username across sites communicates trust to other users. Using my own ENS name also means I own my identity, not the humans behind the app,” Casting said.
Will crypto ideals remain with additional trust built in?
While regular audits, data reporting and transparent privacy measures may become the norm for many crypto projects moving forward, some could be wondering if this will impact the trustless nature of cryptocurrency.
Although this is a legitimate concern, Brody explained that the trustless nature of crypto is no longer feasible. “It was somewhat achievable in the early days of pure crypto when you could self-custody and everything you needed to know was on-chain. Yet, the moment we moved past pure crypto into real-world assets and complex smart contracts, that became impossible,” he said.
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Brody added that now the cryptocurrency ecosystem should be aiming “not for ‘trustless’ crypto and blockchain, but rather decentralized and regulated crypto.” If implemented correctly, Brody believes that all of the benefits promised by crypto will still be achievable. He said:
“Decentralization means that there’s no single firm that can become a gatekeeper or monopolist. Regulation means that we can see, understand, and compare between firms and partners and figure out who is worthy of our trust.”