Crypto companies strive to instill trust in their future products and services.

In 2022, the cryptocurrency ecosystem experienced a turbulent year. The collapse of FTX, Celsius, Three Arrows Capital, and the Terra ecosystem fueled criticism both inside and outside the crypto industry.

These events have resulted in a number of losses. Chainalysis, a blockchain analytics firm, published a report in December of last year stating that the depegging of Terra’s stablecoin, Terra USD Classic (USTC), resulted in weekly-realized losses peaking at $20.5 billion. According to the findings, the subsequent collapse of Three Arrows Capital and Celsius in June 2022 resulted in weekly-realized losses of $33 billion.

While these events may have caused a loss of trust in the crypto ecosystem, it is critical to note that blockchain technology and cryptocurrency have not failed. To put this in context, Dan Morehead, chief operating officer at Pantera Capital, an American hedge fund specializing in cryptocurrency, stated in a letter to investors dated December 19, 2022:

“The narrative peddled by blockchain skeptics, regulators, and politicians misses the mark. FTX’s demise had nothing to do with blockchain technology. It isn’t crypto that has failed. Bitcoin and all other protocols worked flawlessly.”
To Morehead’s point, despite recent events, companies in the crypto and blockchain sectors continue to build and release products. In fact, more projects than ever before are focusing on instilling trust in products.

According to Paul Brody, global blockchain leader at EY and an Enterprise Ethereum Alliance board member, there is a renewed appreciation for the value of rules, regulations, and the idea that the rule of law has a role to play in the crypto sector. “The narrative that ‘code is law’ doesn’t seem to come up as much in discussions anymore,” he says.

Given this, Brody believes that auditors, regulators, and mathematical proofs will be critical in fostering trust and transparency in the cryptocurrency sector:

“I think we can look forward to a future where not only will code be published, but firms will publicly appoint external auditors and welcome regulatory inspections. I believe there is also room for more standardization in how companies in this industry report their data.”
To Brody’s point, a number of crypto companies have begun to prioritize audits and data reporting. Jordan Kruger, co-founder of Vesper Finance and head of decentralized finance (DeFi) at Web3 infrastructure layer Bloq, told Cointelegraph that her company has been audited several times since its launch in 2021.

“It has been subjected to more than fifty independent audits across the various smart contracts that comprise its pools and strategies,” she said.

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While this has been beneficial to Vesper’s users, Kruger believes that regular audits should be viewed as a contribution to the DeFi ecosystem as a whole. “Because of our emphasis on software quality, when other DeFi protocols integrate with us, they can partially draft behind Vesper’s significant investments in auditing.” This is an important point, as DeFi protocols saw some of the largest hacks and scams in 2022. Regular smart contract audits could have prevented some of these incidents.

In addition to DeFi protocol audits, the nonfungible token (NFT) sector is beginning to implement audits, particularly for phygital offerings, or physically-backed NFTs. For example, Jake Spinowitz, community manager at Courtyard, an NFT marketplace that allows collectors to trade and store physical collectibles, told Cointelegraph that Courtyard arranges third-party audits of its custodied items to ensure trust and transparency.

Furthermore, Spinowitz stated that Courtyard is collaborating with security provider Brinks to protect physical assets linked to digital twins. “When tasked with protecting someone’s prized physical possessions, there should ideally be a proven ability to securely vault, handle, and transport those assets (to further mitigate risk, all physical collectibles we vault are insured at market value),” he said.

The combination of audits and the use of a legacy security institution may serve as a successful model for future phygital projects. This could be very useful, as several phygital platforms have expressed concerns about the redemption and storage of physical NFT assets.

While auditing and data reporting may become industry standards in the cryptocurrency ecosystem, protecting user data will be critical as well. Sandy Carter, senior vice president and channel chief at Unstoppable Domains, told Cointelegraph that her company gives domain owners control over the information they share.

“For example, our login feature allows you to share off-chain profile data in order to earn rewards from your favorite DApps or to display your domain on a leaderboard. “The data you share is entirely voluntary,” she explained. Carter also mentioned that Unstoppable Domains recently changed the way domains are created. “As opposed to Unstoppable’s database, all domains will now be automatically minted on the blockchain,” she explained.

Chris Castig, co-founder of Console.xyz, a Web3 chat platform, told Cointelegraph that Web3 principles centered on trust must ensure that any single human, group, or institution has the least possible impact on app users. As a result, he explained, platforms like Console enable users’ social graphs, which include their followers, network, and other information, to exist on the blockchain. He went on to say:

“We use smart contract and NFT integrations so that social graphs live outside of our app and on the blockchain. That means that if your community ever decides to leave Console, it will be simple to find a new home elsewhere. You are the owner of your community, not we.”
Castig went on to say that his company’s identity is based on Ethereum Name Services (ENS) rather than user names. “ENS names (.eth) or any equivalent decentralized identity, such as (.btc,.tez, etc) can be used to replace usernames and passwords on your site,” he explained. As a result, users gain an additional layer of privacy and trust.

“On a social site where I interact with other people, my ability to use a consistent username across sites communicates trust to other users. “By using my own ENS name, I own my identity, not the humans behind the app,” Casting explained.

Will crypto ideals survive with more trust built in?
While regular audits, data reporting, and transparent privacy measures may become the norm for many crypto projects in the future, some may wonder if this will have an impact on cryptocurrency’s trustless nature.

Although this is a valid concern, Brody explained that crypto’s trustless nature is no longer feasible. “It was somewhat attainable in the early days of pure crypto, when you could self-custody and everything you needed to know was on-chain. “However, once we moved beyond pure crypto and into real-world assets and complex smart contracts, that became impossible,” he explained.

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Brody went on to say that the cryptocurrency ecosystem should now aim “not for ‘trustless’ crypto and blockchain, but rather decentralized and regulated crypto.” Brody believes that if implemented correctly, all of the benefits promised by crypto will still be achievable. He stated:

“With decentralization, no single firm can become a gatekeeper or monopolist. Regulation allows us to see, understand, and compare firms and partners to determine who is worthy of our trust.”