Blockchain technology is great as it eliminates the middleman, eliminates the need to trust third parties, and gives users full freedom of choice about their finances or the true ownership of their assets. From Bitcoin (BTC) to decentralized financing, blockchain technology has been keeping this promise for some time – but how trustworthy is crypto really?
Cryptocurrencies were created due to a lack of trust in the existing financial system. However, as crypto evolves and changes, more trust is required: in the developers, miners, exchange operators and other network participants. To some extent, instead of removing the need for them, crypto alters the trusted recipients.
Ilya Abugov, senior analyst at DappRadar, told Cointelegraph, “There are still many centralized items that users need to trust a particular entity or group of entities. Even things like delegated voting depend on delegates acting in the best interests of the community. “Below is an overview of various areas and examples where crypto may not deliver on the promise of a” trustworthy “technology.
Developers and companies
Satoshi Nakamoto created Bitcoin as a pseudonymous developer and released it to the world, so to speak. Today, Bitcoin is supported by millions of users, thousands of miners and nodes, and much more. To a certain extent, Bitcoin comes closest to the “trustless” that crypto has to offer, as no single entity has “too much power” and the code has been checked and used countless times.
There are thousands of different cryptocurrency projects out there too. From altcoins to initial coin offerings to decentralized financial protocols, crypto comes in all shapes and sizes. Complex smart contracts are the name of the game. In this case, users need to trust the developers who build the applications.
Flawed smart contracts have resulted in numerous losses, including the hack from The DAO in 2016 and the most recent hack from Andre Cronje’s Eminence project. Users can always count on auditors to provide them with greater confidence. Again, trust is required, either in the developers or in the auditors. Abugov said to Cointelegraph:
“Demanding users and entities can conduct code audits. Otherwise, the user only takes the risk. Trust is an incomplete term here. The developer may try in good faith but misses vulnerabilities which are then exploited and lost to the user. “
The same can apply when updates or changes are made to the code and users cannot be 100% sure that an update will not result in an error or completely change the project. In the past, this has led to forks like Bitcoin Cash (BCH), which aimed to keep SegWit away from Bitcoin, or Ethereum Classic (ETC), which was created in protest after The DAO was hacked and then forked to retrieve stolen weapons Medium.
So while some trust is required, it can be something conveyed through trust. When it comes to using Bitcoin, the reassurance is that it is only going to work because of the amount of peer review the code has received from the community and developers. The same can apply to other projects in Crypto. However, the effort and time spent reviewing new projects will be significantly less than that spent on Bitcoin.
However, it is worth remembering that open source crypto projects offer this possibility, although most users cannot review the code for themselves because the technology behind it is completely transparent. Jordan Lazaro Gustave, Chief Operating Officer of Aave – a DeFi protocol on Ethereum – told Cointelegraph:
“Users and developers need to trust programmers completely at all times with everything they interact with on a daily basis. The difference for DeFi, however, is that everything is auditable and open source, not like traditional financing. “
Exchange and tokenization
Probably the biggest centralization point of crypto is the popular exchange. These are the main methods that people use to purchase and exchange cryptocurrencies. They are therefore an essential part of the crypto ecosystem. However, they are reminiscent of banking operations where exchange operators have to be trusted to hold their funds while trading. In addition, users must trust the exchange of their personal documents and information after the Know Your Customer verification process is complete.
Needless to say, there have been several instances where users would have preferred not to trust an exchange – for example, the infamous Berg. The Gox collapse resulted in hundreds of millions of dollars in losses. Since then, there have also been countless hacks and exits of fraud on exchanges and projects.
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While people need to trust the exchange, that trust has diminished as the community is constantly monitoring the wallets to keep an eye on suspicious activity. The same goes for other parts of the crypto ecosystem, including tokenization. With Wrapped Bitcoin (WBTC), for example, the user has to trust the person responsible for minting the token and the custodian that keeps the BTC.
While the majority of the exchange representatives believe that decentralized exchanges will not overtake centralized exchanges in the near future, “According to Gustave, Uniswap already has more daily volume than most centralized exchanges”.
While this is one of the main issues with cryptocentralization, it has also been heavily addressed. The decentralized exchange allows users to freely trade cryptocurrencies without having to trust a central party to hold their money and protect their privacy. However, when it comes to converting cryptocurrencies to fiat and vice versa, users must always trust a central party to receive or withdraw fiat currencies.
Regulation and Governments
Hence, trust is required when interacting with both smart contracts and centralized parts of the cryptosphere like exchanges. However, crypto users also need to be aware of the regulations and how they can affect their experience with cryptocurrencies. While crypto can theoretically be used by anyone anywhere, there are several restrictions in different countries that can prevent users from freely using crypto.
This means that there needs to be a certain level of trust in regulators when investing in crypto. While governments may continue to “tolerate” crypto, that could change immediately. For example, privacy coins have recently come under fire and the exchanges have preemptively delisted them to ensure compliance.
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More recently, the UK’s financial watchdog, the Financial Conduct Authority, has banned cryptocurrency derivatives for private users, which means either trading must be stopped or decentralized exchanges must be used. While this may be a possible way to get around the UK FCA ban and other possibly following regulations, it seems that if exchanges can’t find a way to enforce KYC and anti-money laundering guidelines, they’ll be getting rid of it in some way can be or another. Adam Cochran, partner at Cinneamhain Ventures, tweeted on the matter, referring to the precedent set by the recent BitMex lawsuit in the US:
“DAO or no DAO, developers with admin keys, users who create front ends, companies who hire people to work on the protocol, and others who enable or benefit from the contract are all in violation of the BSA . This can result in domain names and hosting servers being confiscated, front ends being shut down, and developers being arrested. “
Is Crypto Trustworthy?
In short, it seems that “no” is the answer. Cryptocurrencies require some degree of trust either in the people who create and manage cryptocurrency networks, in operators on and off the ramp, or even in the regulators overseeing the legality of cryptocurrencies.
However, they require much less trust than any other alternative, without compromising security or efficiency. Most importantly, Bitcoin users don’t have to trust anyone with their savings. They have full ownership of an asset that they know won’t inflate at will, and that’s the greatest value proposition crypto has to offer.