How Escape Hatches Can Boost Crypto’s Reputation

Picture a high-value financial app suddenly ceasing operation, but every user (acting like unsecured creditors) receives their money instantly, hassle-free and without any third party meddling. This is similar to what transpired when the crypto platform dYdX halted its Ethereum operations with $70 million of user funds; however, it managed to swiftly return millions of dollars to its users without lengthy legal proceedings or delays – just the ease of pressing a button for instant access to their funds.

I’d like to provide a clear understanding of the versatile application of our unique security mechanism, known as the Escape Hatch. This feature has proven to be impregnable, and I’ll explain its potential uses in various scenarios. Before we delve into that, let me offer some context as to why discussing the Escape Hatch is significant for understanding blockchain’s role in shaping the future of finance, not just another niche topic within Web3.

This ongoing claims process can be monitored on any Ethereum block explorer and it’s a game-changer for anyone who’s ever worried about losing access to their money during a banking crisis or insolvency. Traditionally, in these cases, financial systems often entangle consumers in lengthy, complicated proceedings when things go south. The first use of the Escape Hatch — an event that is ongoing right now — will be recalled as a watershed moment when companies outside of crypto started to appreciate the unique ability of blockchain rails to win consumer confidence.

As a researcher at StarkWare, I am proud to have designed and integrated the Escape Hatch into the scaling infrastructure we built for dYdX on Ethereum – StarkEx. This mechanism serves as a safety net, guaranteeing that in the event of any disruption, users can swiftly regain access to their funds through the Ethereum main-chain (L1), bypassing bureaucratic hurdles and time constraints.

Consider any situation that might typically drain your resources – for instance, the business where you save money goes bankrupt, gets closed down by authorities, or experiences an alien abduction of all its employees. The Escape Hatch serves precisely this purpose – it allows you to easily withdraw your funds when needed. Remarkably, on October 28th, when dYdX was temporarily unavailable on Ethereum, the Escape Hatch functioned flawlessly, enabling users to retrieve their funds as intended.

The Escape Hatch can be, and should always be, hardwired into blockchain technology, allowing users to withdraw their assets directly. In dYdX’s case, it was hardwired into its setup on L2. It could equally exist on L3 or, for that matter, L99 if the model of blockchain layers expands prolifically in future. It can work for fully decentralized projects, partly decentralized projects (dYdX used a centralized order book and matching system), or centralized entities operating on blockchain. Ethereum co-founder Vitalik Buterin enthusiastically explained the mechanism in his Devcon keynote address today.

He said: “The difference between a Layer 2 and an independent chain is that even if your Layer 2 gets 51% attacks, or 91% attacks, or the team shuts down, Layer 1 still stands there to protect the users. Users are able to prove their assets and their ownership and their state inside of the Layer 2 and migrate it back down to layer one.”

Later on, Vitalik explained that “a real-world test has recently been conducted on this,” referring to the example of dYdX. His insightful remarks left the crowd in awe, leading them to break out in immediate applause.

As a researcher delving into the intricacies of blockchain technology, I cannot stress enough that Layer 2 solutions are more than mere multisignature wallets. What sets them apart is their capacity to allow users to transfer their assets seamlessly between Layer 2 and Layer 1, even in situations where Layer 2 malfunctions, without the need for intervention from the Layer 2 team. This is not merely a theoretical concept; it’s a practical reality that we are witnessing today.

Onlookers will swiftly comprehend that the Escape Hatch isn’t merely an attractive aspect of blockchain; instead, it serves as a potent demonstration for those unfamiliar with the blockchain realm, who are intrigued by the present market excitement, to discover tangible advantages in transferring at least some of their operations onto the blockchain.

All of us who are already in crypto are now in the spotlight, and it’s time to seize it. We have a rare opportunity to capitalize on the attention, take people beyond the headlines, and highlight our relevance. We often find ourselves giving a nail-in-search-of-a-hammer argument for blockchain. The Escape Hatch story is the opposite.

For those attempting to withdraw funds following a bank closure or bankruptcy, it’s clear how frustrating and time-consuming the process can be. If blockchain technology can streamline this process, market demands will make it appealing for people to take notice – that is, except for insolvency lawyers who bill by the minute and get paid before creditors.

In a conventional system, such a shutdown might trigger an extended distribution phase overseen by a single authority. This stage could be time-consuming, and due to human involvement, it may also be susceptible to errors.

Regardless of how seamless the distribution of funds might be, it’s still quite likely that customers may overlook letters or fall behind deadlines for claiming their money, thereby forfeiting it. As it stands now, almost every claims procedure has expiration dates, beyond which the money is claimed by someone else. In contrast, funds from an emergency release would persist on the blockchain, available exclusively to its rightful owner or their heirs, indefinitely.

One way to rephrase the given text could be:

Once a business integrates with blockchain, its operations automatically follow the set guidelines embedded within the blockchain’s code. This eliminates the need for the business to assure consumers about their actions during unforeseen circumstances, as the integrity of the blockchain ensures this. In essence, trust and reliability have never been more effortlessly attainable.

The field of cryptocurrency often faces criticism due to its recurring involvement in scandals. A continuous flow of unfavorable headlines has left many investors feeling let down by bankruptcies, thefts, and misuse of customer funds. This pattern of events has led approximately 60% of Americans to express low or no trust in current methods for investing, trading, or using cryptocurrencies, according to Pew Research Center.

Two years post the fall of centralized crypto exchange FTX, dYdX has showcased the potential of blockchain when a platform wholeheartedly adopts “self-custodial” principles. It’s crucial to make clearer to the public that platforms like FTX falsely claimed to be blockchain applications, disregarding customer interests. In sharp distinction, entities such as dYdX were established with consumer protection in mind.

In terms of FTX, there were numerous accusations that employees were taking advantage of customers by quickly withdrawing their funds from the platform ahead of others. However, such an incident could never occur with dYdX because its codebase, developed by my company StarkWare and built on Ethereum, ensured all customer funds were securely segregated. In other words, if a dYdX employee attempted to steal funds, they wouldn’t have been able to do so.

Whenever we climb into a vehicle today, it’s a habit to buckle up our safety belts. Incredibly, seatbelts are estimated to have saved close to 400,000 lives just within the U.S. However, it may come as a surprise that when Ford introduced seatbelts as an option in 1955, they were not well-received: only about 2% of people opted for them in 1956.

The significance of Ford’s success wasn’t heavily influenced by safety concerns as people were eager for cars. Conversely, in the realm of blockchain technology today, our main challenge lies in persuading individuals to adopt this tech, demonstrating its applicability to innovative scenarios, and providing assurance about its security. Essentially, you’ve entered the crypto world—your escape routes are here, there, and everywhere. Buckle up for the ride!

Keep in mind that the opinions shared within this article belong solely to the author and may not align with the perspectives of CoinDesk, Inc., its proprietors, or its associated entities.