A team of former Jane Street and PIMCO traders have raised $15.8 million to produce a proof-of-solvency protocol for centralized exchanges, stablecoin issuers and other asset managers in the crypto space, according to a press release from the team shown to Cointelegraph. Called “Proven,” the new protocol allegedly uses zero-knowledge proofs to reveal an institution’s assets and liabilities without revealing the personal data of customers.
According to the press release, the Proven team consists of quantitative traders, portfolio managers, and researchers from Wall Street firms Two Sigma, Elm Partners, Pimco, Jane Street and others. The initial $15.8 million seed round was led by crypto-oriented venture capital fund Framework Ventures.
Jane Street was also the former employer of Sam Bankman-Fried, who is accused of fraud after the collapse of his crypto exchange, FTX. Proof-of-solvency protocols attempt to make exchanges more transparent in order to avoid another FTX-like disaster.
Richard Dewey, co-founder of Proven, expressed hope that the new protocol will allow crypto firms to regain the trust of the public while simultaneously protecting privacy, stating:
“The last few months have highlighted an issue that has long plagued both traditional financial and digital asset firms – efficiently fostering trust with customers while maintaining a necessary level of privacy. […] We designed Proven to be a win-win solution that enables customers and regulators to have confidence […] while at the same time protecting sensitive customer information.”
The Proven team said that it already has a list of pilot clients, including CoinList, Bitso, TrueUSD and M11 Credit.
Related: Polygon launches ID product based on ZK proofs
Since the collapse of FTX last year, many centralized exchanges, stablecoin issuers and other crypto custodians have sought to increase transparency by providing cryptographic proof of assets and liabilities. However, providing these proofs has turned out to be a challenge. Although most firms have been able to verify their on-chain assets, liabilities incurred off-chain have been much more difficult to prove to a skeptical public.
Gate.io, OKX, Kraken and other exchanges have attempted to disclose liabilities through cryptographic Merkle trees. This has allowed users to prove that their balances were included in the company’s liability statements. However, this has also been criticized for allegedly allowing companies to falsify liabilities by including negative balances.
Zero-knowledge (ZK) proof of solvency allegedly fixes this problem by allowing the exchange to use ZK proofs to show that customer balances are non-negative, according to app developer sCrypt’s technical explanation of the concept.
However, not all experts on zero-knowledge proofs agree that this process will work. For example, Aleph Zero blockchain founder Matthew Niemerg told Cointelegraph in a statement:
"While zero-knowledge proofs can be used to provide guarantees regarding on-chain balances, they become rather limited in auditing the solvency of a firm unless all liabilities are published (using cryptographic techniques) on-chain. Even then, there are no assurances that all liabilities are disclosed. In short, cryptography will not solve this problem in the even more pathological situation when the party being audited is deceitful."
So, the debate over whether centralized participants can ever be truly transparent continues to rage.