Blockchain technology is great because it eliminates the middleman, removes the need for trusting third parties, and gives users complete control over their finances or the true ownership of their assets. From Bitcoin (BTC) to DeFi, blockchain technology has kept this promise for some time, but, How reliable are cryptocurrencies really?
Cryptocurrencies were created due to a lack of trust in the traditional financial system. However, as cryptocurrencies evolve and change, more trust is required – in developers, miners, exchange operators and other network participants. . To a certain degree Cryptocurrency is changing the recipients of trust instead of removing the need for it.
Ilya Abugov, Principal Analyst at DappRadar, told Cointelegraph: “There are still many centralized elements where users need to trust a particular entity or group of entities. Even things like delegate voting depend on delegates acting in the best interests of the community.Here is an overview of different areas and examples where cryptocurrencies may not deliver on the promise of a technology without trust.
Developers and companies
Satoshi Nakamoto created Bitcoin as a pseudonymous developer and made it accessible to the world, so to speak. Today, Bitcoin is supported by millions of users, thousands of miners and nodes, and a lot more. To some extent, Bitcoin is the closest thing to the “trustworthy” offering of cryptocurrencies as no single entity has “too much power” and the code has been reviewed and used countless times.
There are thousands of different cryptocurrency projects out there too. From altcoins to ICOs to decentralized financial protocols, there are cryptocurrencies 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.
Faulty smart contracts have resulted in numerous losses, including the DAO hack in 2016 and the latest hack of the Eminence project by Andre Cronje. Users can always rely on auditors for extra security. Here too, trust is required, be it towards the developers or the auditors. Abugov said to Cointelegraph:
“Demanding users and entities can conduct code audits. Otherwise, the user is just taking the risk. Trust is an incomplete term here. The developer may try in good faith, but continues to lose vulnerabilities that are later exploited and lost.” for the user. “
The same can be true when updates or changes are made to the code and users cannot be 100% sure that an update will not crash or completely change the project. In the past, this has resulted in forks like Bitcoin Cash (BCH), which were used to keep SegWit away from Bitcoin, or Ethereum Classic (ETC), which was created in protest after the DAO hack and subsequent diversion to reclaim funds. stolen.
So while some trust is needed, it can be conveyed in some way through trust. When using Bitcoin, it is believed that it will only work based on the number of reviews the code has received from the community and developers. The same can apply to other cryptocurrency projects. However, the effort and time it takes to review the latest projects is significantly less than for Bitcoin.
But still, It is worth bearing in mind that open source projects in cryptocurrencies offer this possibility, although most people cannot review the code for themselves because the technology behind it is completely transparent. Jordan Lazaro Gustave, COO of Aave – a DeFi protocol on Ethereum – told Cointelegraph:
“Users and developers need to trust the programmers completely and at all times for everything they interact with on a daily basis. The difference for DeFi, however, is that everything is auditable and open source, not like traditional funding.”
Exchange and tokenization
Probably the largest centralization point for cryptocurrencies is the popular exchange. These explain the main methods people use to purchase and exchange cryptocurrencies, which makes them an important part of the crypto ecosystem. However, they are reminiscent of banking operations where you need to trust the exchange operators to hold your funds while trading. In addition, users must trust the exchange of their personal documents and information after the “KYC” verification process has been completed.
Needless to say, there have been several instances where users would rather not trust an exchange, such as the infamous Mt. Gox landslide that caused hundreds of millions of dollars in losses. Since then there have also been countless scams and hacks on exchanges and projects.
While people need to trust the exchange, that trust wanes as the community constantly monitors the wallets for suspicious activity. The same goes for other parts of the crypto ecosystem, including tokenization. With Wrapped Bitcoin (WBTC), for example, the user must trust the person responsible for issuing the token and the custodian who will hold it.
While most exchange representatives believe that decentralized exchanges will not outperform centralized ones in the near future, “Uniswap already has a higher daily volume than most central exchanges. “after Gustave.
While this is one of the main issues with cryptocentralization, it has also been widely addressed. The decentralized exchange allows users to freely trade cryptocurrencies without having to rely on a central party to keep their money and privacy intact. However, when it comes to converting cryptocurrencies to fiat currencies and vice versa, users must always rely on a central party to receive or pay for fiat currencies.
Regulation and Governments
Hence, trust is required when interacting with both smart contracts and centralized parts of the cryptosphere like exchanges. However, cryptocurrency users should also be aware of the regulations and the potential impact on their cryptocurrency experience. While cryptocurrencies can theoretically be used by anyone anywhere, there are several restrictions in different countries that can prevent users from freely using cryptocurrencies.
This means that when investing in cryptocurrencies, there needs to be some level of trust in regulators. While cryptocurrencies can still be “tolerated” by governments, that could change in the blink of an eye. For example, privacy coins have recently come under fire and the exchanges have proactively removed them from their lists to ensure compliance.
Related Topics: Dash Labels ShapeShift Removal of Privacy Coins as “Imprecise Categorization”
More recently, the UK’s financial watchdog, the Financial Conduct Authority (FCA), has banned cryptocurrency derivatives for home use, which means stop trading or use decentralized exchanges. While this may be a possible way to circumvent the UK’s FCA ban and other regulations they may be following, it appears that the exchange may not find a way to enforce KYC and anti-money laundering guidelines on money, can still be deducted one way or another. Adam Cochran, Partner at Cinneamhain Ventures, tweeted Citing the precedent of the recent BitMEX lawsuit in the US:
“DAO or No DAO You may find that developers with admin keys, users creating front ends, companies hiring people to work on the protocol, and others who allow or benefit from the contract are breaking the BSA, which can lead to it that domain names and hosting servers are confiscated, front ends are shut down and developers are arrested. “
Are cryptocurrencies unreliable?
Simply put, “no” seems to be the answer.. Cryptocurrencies require a degree of trust, whether it be in the people who create and manage cryptocurrency networks, the operators on and off the fiat ramp, or even 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 is the greatest value proposition cryptocurrencies have to offer.