The 2022 year was a turbulent one for the cryptocurrency industry. Following the collapses of FTX, Celsius and Three Arrows Capital, criticisms from within and outside of crypto industry were fueled.
These events have resulted in a variety of losses. 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. Further, the weekly losses realized by Three Arrows Capital and Celsius after their collapse in June 2022 were $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 was nothing to do 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, many projects are focusing more on instilling trust in products than ever before.
Companies strive to build trust
Paul Brody, global leader in blockchain at EY, and an Enterprise Ethereum Alliance member board member, said to Cointelegraph that he feels a renewed respect for rules and regulations, and that the rule-of-law has a place within the crypto sector. “The narrative that ‘code is law’ doesn’t seem to come up so much anymore in discussions,” he said.
Brody believes that auditors and regulators as well as mathematical proofs are crucial to building trust in the crypto industry.
“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. Jordan Kruger, cofounder of Vesper Finance, and head of decentralized financing (DeFi), at Web3 infrastructure layer Bloq told Cointelegraph her company has been subject to numerous audits since its launch 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. These scams could have been prevented by smart contract audits.
Audits are being performed on DeFi protocols. The nonfungible token sector (NFT) is also starting to implement audits, especially when it comes to phygital offers, 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.
Spinowitz also explained that Courtyard has partnered with Brinks security provider to protect physical assets 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.
Combining audits with the use of a legacy security institution may be a good model for phygital project development. This could be a useful model, since a lot of phygital platforms are concerned about the redemption and storage of NFT assets.
Auditing and reporting data may soon become standard in the cryptocurrency ecosystem. However, it is crucial to protect user data. Sandy Carter is senior vice president at Unstoppable Domains and channel chief. She explained to Cointelegraph that Unstoppable Domains allows domain owners control over 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. Carter pointed out that Unstoppable Domains had recently changed the process of generating domains. “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 also noted that Ethereum Name Services (ENS), is used by his company 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. It also provides an additional layer for user privacy and trust.
“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.
With additional trust, will crypto ideals be preserved?
Although regular audits, data reporting, and transparency regarding privacy may be the norm in many crypto projects moving forwards, some might wonder if this will affect the trustlessness of cryptocurrency.
Brody stated that this is a legitimate concern. However, the trustless nature crypto makes it impossible to solve. “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 stated:
“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.”