Crypto marketplaces such as FTX have caused huge losses to users because of the lack of full custody coverage. These issues stem from the way current electronic markets were simply designed as copies of paper-based markets.
Of course, the big irony in Web3 is the fact that all major crypto markets were built in a centralized manner. David Chaum, legendary cryptographer and privacy advocate, has recently been on a tear arguing for exchanges to use stronger cryptography to protect client funds.
He writes about one potential solution – multi-party computation – in his Crypto 2023 opus:
"Multi-party computation (MPC)...was coined by me to describe what are now increasingly often-deployed cryptographic techniques. These allow multiple encrypted inputs to be converted to a cleartext output by an agreed algorithm. The 'computation' is in effect performed by the cryptographic protocol itself such that no party can decrypt the encrypted inputs posted, but all parties can be certain that the cleartext output was computed correctly from exactly those inputs."
What this means is the keys issued by an exchange are useless to anyone except the trader in question – who maintains control of their assets. He writes further about particular instantiations of this technology, including use of other advanced cryptographic solutions like zero-knowledge proofs and atomic swaps.
"It is immediately applicable to crypto markets, where the need is most urgent and acutely felt," Chaum writes. "Once deployed, it will demonstrate that traditional markets can benefit significantly from adopting such best practices from crypto."
After the collapse of FTX, it's clear something needs to change inside the crypto industry. A step towards making exchanges a little more resilient and expanding user control over their own assets is a step in the right direction. At the very least, if Web3 will continue to have centralized points of failure, at least sprinkle in a little "crypto."
– D.K.
EmoticonEmoticon