"Even if centralised exchanges are now going above and beyond to prove they have a 100% reserve of the assets, users still have no real...

'Get your money off exchanges', warns Bitboy Crypto after FTX scandal #3

"Even if centralised exchanges are now going above and beyond to prove they have a 100% reserve of the assets, users still have no real control."

Large centralised exchanges are currently being pressured by industry analysts into showing proof that they have the reserves to meet user redemptions on the assets that they hold.

However, CEO of Chainge Finance argued that this is another smoke screen providing a fake sense of security to users, while keeping the status quo where the user still relies on that same group of people to make good choices for them.

He said: "Decentralised exchanges are not only a way to protect the users’ assets. They also represent an innovative way of trading.

Because, as we all know, each centralised exchange stands as a 'silo island', while decentralised exchanges have the ability to connect all markets together."

Ethereum founder proposes solution

In a recent blog post, Ethereum founder Vitalik Buterin proposed that centralised crypto exchanges could build a system where the exchange can't withdraw a depositor's funds at all without their consent.

He said: "The simplest way to prove deposits is to simply publish a list of (username, balance) pairs. Each user can check that their balance is included in the list, and anyone can check the full list to see that (i) every balance is non-negative, and (ii) the total sum is the claimed amount."

In order to preserve the highest levels of privacy, Buterin advised considering "the next invention: the Merkle tree technique"."

The easiest backwards-compatible way to improve the safety of custodial exchanges is to add proof of reserve. This consists of a combination of proof of assets and proof of liabilities," he said.

Buterin said he hopes that the industry moves closer to all exchanges being non-custodial.

Countdown to crypto armageddon

The recent crypto chaos took hold after Binance CEO Zhao inflamed a bank run on the FTX exchange with a tweet stating that Binance would liquidate its holdings in FTX's native FTT token.

FTX was backed by FTT which was sold at low prices to Alameda Research and the trading arm of the exchange was heavily stacked with FTX's token, to the tune of $3.66bn (£3.05bn) “unlocked FTT” and $2.16bn “FTT collateral” as assets.

When FTX artificially inflated the value of FTT, Alameda was able to use FTT as collateral for trading on the FTX exchange.

Before the implosion of FTX and Alameda Research, Cory Klippsten, CEO of investment platform Swan Bitcoin, said: “It’s fascinating to see that the majority of the net equity in the Alameda business is actually FTX’s own centrally controlled and printed-out-of-thin-air token".

Binance held a substantial amount of FTT, acquired through a past FTX buy-out deal.
Zhao tweeted: "Liquidating our FTT is just post-exit risk management, learning from LUNA. "We gave support before, but we won't pretend to make love after divorce. We are not against anyone. But we won't support people who lobby against other industry players behind their backs. Onwards." Zhao's announcement that he planned to sell the billions of FTT held by Binance sent the value of the cryptocurrency into an unrecoverable tailspin. FTT reached an all-time high of $85 in September 2021, but after the dramatic collapse of the FTX exchange, it is now struggling to breathe at $1.33.