2022 was a turbulent year for the cryptocurrency ecosystem. Criticism inside and outside the crypto industry has been fueled following the collapse of FTX, Celsius, Three Arrows Capital and the Terra ecosystem.
A number of casualties were recorded in these events. Blockchain analytics firm Chainalysis released a report last December stating that depegging of Terra’s stablecoin Terra USD Classic (USTC) hit $20.5 billion in weekly realized losses. Findings also show that the subsequent collapse of Three Arrows Capital and Celsius in June 2022 resulted in weekly realized losses of $33 billion.
While these events may have caused a loss of trust within the crypto ecosystem, it is important to note that blockchain technology and cryptocurrency have not failed. To put this into perspective, Dan Morehead, chief operating officer at Pantera Capital — an American hedge fund specializing in cryptocurrencies — stated in a letter to investors dated December 19, 2022:
“The narrative being pushed by blockchain skeptics and some regulators and politicians misses the point. The collapse of FTX had nothing to do with blockchain technology. It’s not crypto that has failed. Bitcoin and all other protocols worked perfectly.”
According to Morehead, companies in the crypto and blockchain sectors continue to develop and release products despite recent events. In fact, more than ever, a number of projects are focused on building trust in products.
Companies want to create trust
Paul Brody, global blockchain head at EY and a board member of the Enterprise Ethereum Alliance, told Cointelegraph that he feels a renewed respect for the value of rules, regulations, and the idea that the rule of law has a role to play in the crypto space. “The ‘code is law’ narrative doesn’t seem to come up as much in discussions anymore,” he said.
Given this, Brody believes that auditors, regulators and mathematical proof will play a crucial role in building trust through transparency within the crypto sector:
“I think we can look forward to a future where not only will codes be published, but companies will publicly appoint external auditors and welcome government inspections. I think there is also a role for more standardization of how companies in this industry report their data.”
According to Brody, a number of crypto companies have started to focus on auditing 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 undergone a series of audits since its inception in 2021.
“It has been subject to more than fifty independent audits across the numerous smart contracts that comprise its pools and strategies,” she said.
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Kruger noted that while this was important to Vesper users, regular audits should be viewed as contributing to the overall DeFi ecosystem. “Our focus on software quality means that when integrated with us, other DeFi protocols can sometimes lag behind Vesper’s significant investments in testing.” This is an important point given that DeFi protocols are some of the biggest hacks and scams of the year experienced in 2022. Regular smart contract audits may have prevented some of this.
In addition to the audits performed on DeFi protocols, the non-fungible token (NFT) sector is starting to implement audits, especially when it comes to the phygital offerings or physically backed NFTs. For example, Jake Spinowitz, community leader at Courtyard — an NFT marketplace that allows collectors to trade and store physical collectibles — told Cointelegraph that Courtyard arranges third-party audits of its held items to ensure trust and transparency.
Additionally, Spinowitz explained that Courtyard is working with security provider Brinks to protect physical assets linked to digital twins. “In the task of protecting an individual’s valuable physical possessions, there should ideally be a demonstrated ability to safely store, handle and transport those assets (to further mitigate risk, all physical collectibles we store are insured at market value),” he said.
The combination of audits along with the use of a legacy security institution can serve as a successful model for the advancement of Phygital projects. This could certainly come in handy as a number of Phygital platforms have raised concerns about 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 be critical. Sandy Carter, senior vice president and channel chief at Web3 domain provider Unstoppable Domains, told Cointelegraph that her firm allows domain owners to control the information they share.
“For example, our sign-up feature gives you the ability to share off-chain profile data to earn rewards from your favorite DApps or have your domain featured on a leaderboard. The data you share is completely opt-in,” she explained. Additionally, Carter noted that Unstoppable Domains has recently changed the way domains are minted. “All domains are now automatically minted into 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’s trust-centric principles must ensure minimal impact that any individual, group, or institution has on the app’s users can. 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 stated:
“We use smart contracts and NFT integrations to make social graphs live outside of our app and on the blockchain. That means it’s easy to find a new home elsewhere if your community ever wanted to leave the console. You own your community, not us.”
Castig further noted that his company uses Ethereum Name Services (ENS) for identity, not usernames. “ENS names (.eth) or any equivalent decentralized identity like (.btc, .tez, etc.) can be used to replace usernames and passwords on your website,” he said. In return, an additional level of user privacy and trust is achieved.
“On a social site where I interact with other people, my ability to use a consistent username across sites instills trust in other users. Using my own ENS name also means I own my identity, not the people behind the app,” Casting said.
Will crypto ideals endure with added trust built in?
While regular audits, data reporting, and transparent privacy practices may become the norm for many crypto projects, some may wonder if this will affect the cryptocurrency’s trusted nature.
While this is a legitimate concern, Brody stated that the trusted nature of crypto is no longer viable. “In the early days of pure crypto, this was reasonably doable when you could store yourself and everything you needed to know was on chain. But the moment we moved beyond just crypto and into real-world assets and complex smart contracts, that became impossible,” he said.
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Brody added that the cryptocurrency ecosystem should now “aim not for ‘trustworthy’ cryptography and blockchain but for decentralized and regulated cryptography.” If implemented properly, Brody believes that all the benefits promised by crypto will still be achievable. He said:
“Decentralization means that there is no single company that can become the gatekeeper or monopolist. Regulation means we can see, understand and compare companies and partners and find out who deserves our trust.”
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