The founder of Ethereum (ETH), Vitalik Buterin, has proposed a solution for how exchanges may continue to be transparent to their users, and the CEOs of two of the biggest crypto companies in the world are endorsing it.
Following the collapse of FTX and the revelations that followed, there was increased scrutiny of crypto exchange reserve arrangements, pushing numerous firms to publish their reserves to demonstrate solvency.
Buterin proposed a system in which users can verify their personal balances using a Merkle Tree while being protected by the privacy of a zk-SNARK.
“The simplest thing that we can do is put all users’ deposits into a Merkle tree (or, even simpler, a KZG commitment), and use a ZK-SNARK to prove that all balances in the tree are non-negative and add up to some claimed value. If we add a layer of hashing for privacy, the Merkle branch (or KZG proof) given to each user would reveal nothing about the balance of any other user.”
Merkle Trees can speed up information verification without disclosing an entire data set and help encrypt blockchain data more securely and efficiently. A specific class of polynomial commitment schemes called KZGs enables verifiers to validate asserted evaluations.
In response to Buterin’s suggestion, Coinbase CEO Brian Armstrong congratulated the co-founder of Ethereum and asserted that on-chain accounting will be crucial for the future of the sector.