Blockchain technology is great because it eliminates the middleman, removes the need to trust third parties, and gives users full control over their finances, or the real ownership of their wealth. From Bitcoin (BTC) towards decentralized funding, blockchain technology has lived up to this promise for quite some time – but how reliable is crypto, really?
Cryptocurrencies came into being as a result of a lack of trust in the old financial system, but as crypto continues to evolve and change, more trust is needed: in the developers, miners, exchange operators, and other network participants. Crypto changes the trust recipients to some degree rather than obviating the need for it.
Ilya Abugov, chief analyst at DappRadar, told Cointelegraph, “There are still many centralized elements, where users have to trust a particular entity or group of entities. Even things like delegated voting depend on the delegates acting in the interest of the community. So, below is an overview of several areas and examples where crypto may not live up to its promise of “reliable” technology.
Developers and companies
Satoshi Nakamoto created Bitcoin as a pseudonymous developer and brought it into the world, as it were. Today, Bitcoin is supported by millions of users, thousands of miners and nodes, and many more. Bitcoin is, to some extent, the closest thing to “trustless” that crypto has to offer, as no entity has “too much power” and its code has been revised and used countless times.
There are also thousands of different cryptocurrency projects. From altcoins to initial coin offerings and decentralized financial protocols, crypto comes in all shapes and sizes. Complex smart contracts are the name of the game, and in this case, users have to trust the developers who create the applications.
Faulty smart contracts have resulted in numerous losses, including The DAO’s 2016 hack and the recent hack of Andre Cronje’s Eminence project. Users can always count on auditors to provide them with more security, but again, trust is required, both in the developers and the auditors. Abugov told Cointelegraph:
“Advanced users and entities can perform code audits. Otherwise, the user simply takes the risk. Trust is an incomplete term here. The developer may be trying in good faith, but is still missing vulnerabilities which are then exploited and result in loss to the user. “
The same can be the case when updates or changes to the code are made and users cannot be 100% sure that an update will not lead to an error or change the project completely. This has led to forks such as Bitcoin Cash in the past (BCH), which aimed to keep SegWit out of Bitcoin, or Ethereum Classic (AND SO ON), which was created in protest after The DAO hack and subsequent fork to retrieve stolen money.
So while some confidence is required, it can be imparted to some extent through confidence. When using Bitcoin, there is confidence that it just works because of the amount of peer review the code has received from the community and developers. The same can be true for other projects in crypto; However, the effort and time put into reviewing newer projects will be significantly less than that spent on Bitcoin.
However, it’s worth bearing in mind that while most people can’t judge the code for themselves, open-source crypto projects provide that opportunity, as 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 must fully and always trust coders when it comes to everything they deal with every day. The difference for DeFi, however, is that everything is controllable and open-source, unlike traditional finance. “
Exchanges and Tokenization
Probably the biggest point of crypto centralization is the popular exchanges. These account for the main methods by which people acquire and exchange cryptocurrencies, so they are an essential part of the crypto ecosystem. However, they are reminiscent of banking, where one has to rely on the stock market managers to hold their money while trading. In addition, users must also trust the exchange with their personal documents and information after the Know Your Customer verification process is completed.
Needless to say, there have been multiple instances where users would rather not have trusted an exchange – the infamous Mt. Gox collapsed, resulting in hundreds of millions of dollars in losses. Since then, there have also been numerous hacks and scams on exchanges and projects.
While people must trust exchanges, this trust has become thin as the community constantly monitors exchange wallets to keep an eye out for suspicious activity. The same is true for other parts of the crypto ecosystem, including tokenization. Packaged Bitcoin (WBTC), for example, requires the user to trust the people responsible for minting the token and the custodian holding the BTC.
While the majority of the exchange representatives believe decentralized exchanges will not catch up with centralized exchanges “Uniswap will have more daily volume in the near future than most centralized exchanges,” said Gustave.
While this is one of the major issues when it comes to cryptocurrency centralization, it is also one that has been heavily addressed. Decentralized exchanges allow users to freely trade cryptocurrencies without having to trust a centralized party to hold their money and also keep their privacy intact. However, when it comes to converting cryptocurrencies to fiat and vice versa, users should always trust a centralized party to receive or pay out fiat currencies.
Regulations and Governments
Trust is thus required when interacting with both smart contracts and centralized parts of the cryptosphere, such as exchanges. However, crypto users should also be aware of regulations and how it can affect their experience with cryptocurrencies. While crypto can in theory be used by anyone, anywhere, there are multiple restrictions in different countries that can prevent users from using crypto freely.
This means that there must be a degree of confidence in regulatory bodies when investing in crypto. While crypto is simply “tolerated” by governments, that can change in the blink of an eye. For example, privacy coins have recently come under fire, with exchanges preemptively scrapping them to ensure compliance.
More recently, the United Kingdom’s financial watchdog, the Financial Conduct Authority, banned cryptocurrency derivatives from retail users, which means stopping trading or using decentralized exchanges. While this could be a possible way to get around the UK’s FCA ban and other regulations that may follow, it seems that unless exchanges can find a way to enforce KYC and Anti-Money Laundering Policy, they can still be deleted in some way. Adam Cochran, Partner at Cinneamhain Ventures, tweeted on the matter, citing the precedent set by the recent BitMex lawsuit in the United States:
“DAO or no DAO, you can see developers with admin keys, users creating front ends, companies hiring individuals to work on the protocol, and others enabling or benefiting from the contract are in violation of the BSA. . This can lead to seizure of domain names and hosting servers, shutdown of front ends, and developer arrest. “
Is crypto reliable?
In short, “no” is the answer. Cryptocurrencies require a degree of trust in the people who create and maintain cryptocurrency networks, in operators on and off the disaster, or even in the regulators overseeing the legality of cryptocurrencies.
However, they require far less trust than any other alternative, without compromising on safety and efficiency. Most importantly, Bitcoin users shouldn’t trust anyone in their savings. They have full ownership of an asset that they know is not going to be blown up at will and that is the greatest value proposition that crypto has to offer.