In the short term, there are two clear "classes" of exchanges: custodial exchanges and non-custodial exchanges. Today, the latter category is just DEXes such as Uniswap, and in the future we may also see cryptographically "constrained" CEXes where user funds are held in something like a validium smart contract. We may also see half-custodial exchanges where we trust them with fiat but not cryptocurrency.

Both types of exchanges will continue to exist, and the easiest backwards-compatible way to improve the safety of custodial exchanges is to add proof of reserve. This consists of a combination of proof of assets and proof of liabilities. There are technical challenges in making good protocols for both, but we can and should go as far as possible to make headway in both, and open-source the software and processes as much as possible so that all exchanges can benefit.

In the longer-term future, my hope is that we move closer and closer to all exchanges being non-custodial, at least on the crypto side. Wallet recovery would exist, and there may need to be highly centralized recovery options for new users dealing with small amounts, as well as institutions that require such arrangements for legal reasons, but this can be done at the wallet layer rather than within the exchange itself. The way magic.link interacts with platforms like Polymarket is an example of such an approach in action. On the fiat side, movement between the traditional banking system and the crypto ecosystem could be done via cash in / cash out processes native to asset-backed stablecoins such as USDC. However, it will still take a while before we can fully get there.